## 1. Fiscal Stance in 2023–24

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---

### Key macroeconomic developments and indicators
- Real GDP growth slowed to 1.8 percent in 2023.
- Private consumption gained momentum in 2023, supported by real wage growth exceeding 5 percent.
- Net exports contributed positively to growth; private investment declined and the inventory buildup of 2021–22 sharply reversed.
- Unemployment was 4.3 percent in 2023:Q4.
- Headline inflation decelerated to 3.1 percent in March 2024.
- Core inflation remained stickier at 3.9 percent (core excluding energy, food, alcohol, and tobacco); services prices still growing by 5 percent.
- Current account was close to balance; investment income payments increased by 46 percent.
- Gross international reserves increased with higher capital account surplus and financial account balance.
- Banking sector: double-digit private credit growth since March 2022, driven notably by mortgages; banking system well capitalized and liquid with record profits in 2023; non-performing loans at 4.4 percent of total loans in February.
- BNB policy context: currency board tied to the euro; the BNB announced increases in the base rate in line with the ECB. Minimum reserve requirement (MRR) currently 12 percent; ECB MRR currently 1 percent.

### Fiscal developments in 2023 and 2024
- Fiscal deficit on a cash basis increased by 2.3 percentage points to 3.1 percent of GDP in 2023. (This deficit includes an advance payment (0.7 percent of GDP) for municipal projects.)
- Public debt at 22 percent of GDP (second lowest in the EU).
- Revenue declined by 2.2 percent of GDP in 2023, primarily due to weaker nontax revenues, VAT, and grants.
- Expenditure remained stable in percent of GDP in 2023 despite higher spending on pensions, wages, and investment, largely owing to a significant reduction in the cost of electricity subsidies.
- Advance payment highlighted: 1.2 billion leva (0.65 percent of GDP) for municipal projects recorded as capital investment but transferred to a special account outside general government.
- 2024 budget projects expenditure to increase by 1.3 ppts of GDP, driven by social spending (notably an 11-percent increase in pensions) and public investments largely financed by EU funds.
- Budget assumptions include an optimistic 0.4 percent of GDP revenue increase from improved tax collection and dividends of state-owned companies set at 100 percent of their profits.
- Revenue-raising measures in the 2024 budget are largely ad-hoc; increase in the maximum insurable income is described as a welcome but insufficient first step.

### Macroeconomic outlook and projections (selected)
- Baseline growth: 2.7 percent in 2024 (staff projection) assuming stabilization of the inventory cycle and EU funds delivery.
- Projected growth path (real GDP): 2024: 2.7; 2025: 2.9; 2026: 2.9; 2027: 2.7; 2028: 2.7; 2029: 2.6.
- Private investment projected to remain subdued and constrain growth below potential; more robust recovery expected from 2025 with anticipated euro adoption and reduced domestic uncertainty.
- Long-term: growth expected to decelerate to about 2½ percent, reflecting a declining working-age population, lower investment than peers, and low productivity growth.
- Inflation and wages:
  - GDP deflator: 2023: 7.5; 2024: 3.6; 2025: 3.4.
  - HICP (average) projections: 2024: 3.2; 2025: 2.7; 2026: 2.1; 2027–2029: 2.0.
  - Nominal wages projections: 2024: 8.9; 2025: 8.9; 2026: 8.0; 2027: 7.6; 2028: 7.6; 2029: 7.5.
- Current account projections (percent of GDP): 2024: -0.8; 2025: -1.8; 2026: -1.4; 2027: -0.7; 2028: -0.7; 2029: -0.7.
- Gross international reserves (billions of euros) projections: 2024: 46.1; 2025: 50.2; 2026: 53.2; 2027: 56.3; 2028: 63.4; 2029: 69.1.
- Fiscal outlook (percent of GDP):
  - Revenue: 2024: 36.3; 2025: 36.3; 2026: 35.7; 2027: 35.7; 2028: 35.7; 2029: 35.6.
  - Expenditure: 2024: 39.1; 2025: 39.2; 2026: 39.0; 2027: 38.4; 2028: 38.4; 2029: 38.3.
  - General government net lending/borrowing: 2024: -2.7; 2025: -3.0; 2026: -3.4; 2027: -2.7; 2028: -2.7; 2029: -2.7.
- Memorandum: Nominal GDP (billions of euros): 2023: 93.9; 2024: 100.0; 2025: 106.5; 2026: 112.3; 2027: 117.9; 2028: 123.8; 2029: 129.8.

### Risks and uncertainty
- Considerable uncertainty and downside risks from global and heightened domestic political and policy uncertainties.
- Political risks:
  - Potential for protracted political instability if June 2024 elections do not yield a clear majority, which could hamper policymaking, undermine confidence and investment, and delay NGEU funds disbursement.
  - Longer delay in euro adoption beyond 2025 could negatively affect sentiment and investment.
- EU funds absorption risk: Less-than-full absorption of NGEU funds by the 2026 deadline would hinder growth, green transition, and income convergence.
- Financial risks:
  - Persistent elevated credit growth could deteriorate asset quality and engender a house prices–mortgage credit spiral.
  - Systemic financial instability risk from high interest rates, asset repricing, and political uncertainty.
- Labor and competitiveness risks:
  - Continued wage growth outpacing productivity could undermine competitiveness and drag growth.
- External risks:
  - Weaker-than-expected pickup in trading partners’ demand or intensification of regional conflicts that increase commodity prices and rekindle inflation.
- Positive scenario: Timely euro area accession likely to boost confidence and spur investment.

### Assessment of fiscal stance and policy priorities
- Staff view: 2024 budget is expansionary; a neutral fiscal stance in 2024 would strike an appropriate balance between supporting the expected small rebound in growth and not jeopardizing disinflation.
- Staff estimates fiscal policy contributed 1.3 ppts of inflation in 2021 and about 3 ppts in 2022; fiscal policy likely helped somewhat reduce demand pressures in 2023.
- Achieving a neutral fiscal stance in 2024 would mean reducing the planned deficit by about 1 percentage point of GDP.
- On an accrual basis, both traditional CAPB and CAPB excluding EU grants indicate contractionary stance in 2023; on cash basis measures (with adjustments) 2023 is assessed as slightly tight to slightly expansionary depending on adjustments (Box 1). In 2024, all accrual and adjusted cash measures indicate an expansionary stance.
- Authorities’ view: broadly agree with the outlook and risks; authorities see disinflation on track for joining the euro in 2025 under current fiscal policy and estimate the price stability criterion will be met in late 2024.

### Policy recommendations and reform priorities
- Short-run:
  - Secure disinflation with minimal impact on growth; maintain cautious fiscal policy while supporting the recovery.
  - Achieve fiscal neutrality in 2024 preferably through measures that permanently raise revenue rather than cuts to investment.
- Specific revenue and fiscal measures suggested:
  - Fully reverse reduced VAT rates that are no longer necessary.
  - Eliminate the cap on social contributions.
  - Increase personal income tax (PIT) rates.
  - Complement revenue measures with policy-driven reductions in subsidies.
- Avoid cutting investment as the primary fiscal adjustment variable to preserve long-term growth prospects.
- Medium- and long-run reforms:
  - Raise spending efficiency by improving fiscal transparency, public investment management, and governance, including procurement (e.g., publishing beneficial ownership information of contract awardees).
  - Strengthen capacity to absorb EU funds.
  - Improve efficiency in social spending (social protection, health, education) to improve social protection coverage and human capital.
  - Conduct a comprehensive review of public wages to inform wage policy.
  - Increase financial sustainability of the pension system while improving pension adequacy; address rising pension system deficits covered by large fiscal transfers that crowd out productive spending.

---

### Box 2. Pension System: Adequacy and Sustainability — key points
- Pension adequacy:
  - Pension system requires sizable budgetary transfers and pension levels keep many elderlies in poverty.
  - During the pandemic, more than half of fiscal support to households targeted pensioners; pension adequacy increased noticeably.
  - Old-age and pensioners poverty remains high by EU standards.
  - The minimum pension (received by almost half of pensioners at end-2023):
    - is close to the official poverty line;
    - is equivalent to about 60 percent of the minimum wage;
    - is less than a one-quarter of the average wage.
- Fiscal costs and sustainability signals:
  - Fiscal transfers to cover the pension deficit increased to reach 5½ percent of GDP.
  - Selected reported figures (as presented) — Payments to pensioners: 5.7, 4.6, 2.6, 2.5, 0.3, 0.4; Numbers of pensioners: 1.3, 2.0, 1.3, 0.0, 0.1, 0.1; Contributions at maximum insurable income as a share of total contributions: 13.6, 15.2, 17.8, 18.2, 21.1, 21.2; Number of contributors: 6.4, 8.4, 10.9, 11.1, 14.2, 14.2.
- Key staff recommendations:
  - Increase incentives to contribute by:
    - introducing in the benefit formula a direct link with contributions actually paid;
    - eliminating the ceiling on contributions (the “maximum insurable income”);
    - eliminating the ceiling on pensions;
    - increasing the contribution rate.
  - Reform the tax system to make it fairer and address rising spending needs:
    - Raising the CIT rate to 15 percent for big multinational corporations (revenue gains limited).
    - Move from the low flat corporate and personal income tax rates of 10 percent to higher and progressive (for PIT) rates.
    - Increase coverage of carbon taxation to generate revenues and support green investment.
  - Address informality and widen tax bases: ensure compliance of large taxpayers, strengthen control and auditing, carefully handle the planned merger of National Revenue Agency and Custom Agency, strengthen governance and reduce corruption.
  - Prevent buildup of contingent liabilities from SOEs and pursue SOE governance reforms.
- Authorities’ views:
  - Broad agreement on need for fiscal reforms but caution against moving to progressive PIT at this stage; concerns that higher marginal taxation may increase tax evasion.

### Box 4. Integration in Global Value Chains — key points
- Overview:
  - Bulgaria’s GVC integration flattened in the last decade after twenty years of growth before the global financial crisis.
  - GVCs are well diversified but concentrated in low-technology, labor-intensive industries.
  - Forward and backward linkages with the EU are among the lowest compared to other EU newer member states (NMS).
  - Links with Russia have been large historically, especially in fuel and energy; decoupling is ongoing.
- Drivers and policy implications:
  - Key drivers identified include: Road infrastructure; Rule of law; Manufacturing; Population indicators; R&D (% GDP); Private credit (% GDP); Internet connectivity; Crisis dummy; Real wages.
  - Infrastructure and governance are particularly important drivers of integration and are lagging in Bulgaria.
  - Recommended policies:
    - Invest in infrastructure and improve governance.
    - Foster innovation through R&D to move toward higher-technology activities.
    - As domestic wages rise, focus on non-price elements of competitiveness.
  - Governance, AML/CFT, and energy considerations:
    - Strengthen governance and mitigate corruption; public procurement is high-risk for corruption.
    - Bulgaria entered the FATF “grey list” in 2023 and committed to an action plan.
    - Energy shifts: pivot away from Russian gas, replace Russian nuclear fuel with U.S. fuel, dependence on Russian oil increased under a derogation but expected to decline as exemption ended in 2024Q1.
    - European Commission will provide over 1 percent of GDP to help phase out coal following adoption of Territorial Just Transition Plans.
    - Maintain incentives for energy saving and efficiency, invest in renewables, reduce coal use, and address grid connection bottlenecks.

---

### Annex I. Public Debt Sustainability Analysis — summary
- Overall risk of sovereign stress: Low.
- Commentary:
  - Public debt is the second lowest in the EU and is sustainable.
  - Medium-term risks: staff assessment = Low despite a moderate mechanical signal; persistent deficits put debt on an upward trend but upper bound remains below 60 percent of GDP by 2030.
  - Long-term risks: Moderate due to aging-related health and social security expenditures.
- Baseline public debt path (percent of GDP):
  - Actual 2023: 22.0
  - 2024: 23.4
  - 2025: 24.9
  - 2026: 27.0
  - 2027: 28.4
  - 2028: 29.7
  - 2029: 31.0
  - 2030: 32.2
  - 2031: 33.4
  - 2032: 34.6
  - 2033: 35.7
- Change in public debt (selected): 0.5; 1.4; 1.5; 2.0; 1.4; 1.4; 1.3; 1.2; 1.2; 1.2; 1.1.
- Primary deficit (selected): 2.6; 2.2; 2.2; 2.4; 1.7; 1.7; 1.6; 1.6; 1.6; 1.6; 1.6.
- Noninterest revenues (selected percent of GDP): 34.7; 36.3; 36.3; 35.7; 35.7; 35.6; 35.6; 35.6; 35.6; 35.6; 35.6.
- Noninterest expenditures (selected percent of GDP): 37.3; 38.5; 38.5; 38.0; 37.4; 37.3; 37.2; 37.2; 37.2; 37.2; 37.2.
- Gross financing needs (percent of GDP, selected): 4.7; 4.5; 4.7; 4.6; 4.3; 3.8; 4.9; 3.7; 7.2; 6.1; 7.0.
  - Debt service (selected): 2.1; 2.3; 2.5; 2.3; 2.6; 2.1; 3.3; 2.1; 5.6; 4.5; 5.4.
- Macro assumptions (memo):
  - Real GDP growth (percent): 1.8; 2.7; 2.9; 2.9; 2.7; 2.7; 2.6; 2.6; 2.6; 2.6; 2.6.
  - Inflation (GDP deflator; percent): 7.5; 3.6; 3.4; 2.4; 2.3; 2.2; 2.2; 2.2; 2.2; 2.2; 2.2.
  - Effective interest rate (percent): 2.3; 2.5; 3.3; 4.3; 4.3; 4.0; 3.8; 3.6; 3.5; 3.5; 3.3; 3.2.
- Realism: "Realism analysis does not point to major concerns."
- Medium-term risk indicators:
  - Debt fanchart index (DFI): 1.9 — Risk signal: Moderate.
  - GFN financeability index (GFI): 5.8 — Risk signal: Low.
  - Medium-term index aggregated: Final assessment: Low risk.
- Probabilities (2024–2029):
  - Prob. of missed crisis, if stress not predicted: 18.2 pct.
  - Prob. of false alarms, if stress predicted: 39.8 pct.
- Policy responses recommended:
  - Continue revenue-side reforms to tackle fiscal risks from population aging and the pension deficit.
  - Make effective use of EU funds; manage public external borrowing so amortization pressures are covered.
  - Maintain FX reserves adequate for the currency board arrangement.

---

### Annex III. Risk Assessment Matrix — selected risks and policy responses
- Intensification of regional conflicts
  - Relative Likelihood: High; Time Horizon: ST; Expected Impact: Medium.
  - Policy Response: Fiscal stimulus and well-targeted, temporary support for vulnerable groups.
- Commodity price volatility
  - Relative Likelihood: High; Time Horizon: ST, MT; Expected Impact: Medium.
  - Policy Response: Targeted and temporary support for vulnerable groups offset to avoid larger fiscal deficit.
- Abrupt global slowdown
  - Relative Likelihood: Medium; Time Horizon: ST, MT; Expected Impact: High.
  - Policy Response: Fiscal stimulus and targeted support if market access secured and inflation not renewed; preemptively reduce real estate risks.
- Monetary policy miscalibration
  - Relative Likelihood: Medium; Time Horizon: ST, MT; Expected Impact: Medium.
  - Policy Response: With currency board, fiscal tightening and multi-year wage restraint consensus may be required to break wage-price spirals.
- Systemic financial instability
  - Relative Likelihood: Medium; Time Horizon: ST, MT; Expected Impact: Medium.
  - Policy Response: Increase monitoring, strengthen macroprudential policy, ensure financial crisis management framework.
- Bulgaria-specific risks:
  - Political uncertainty (post-parliamentary election of June 9th): Relative Likelihood: High; Time Horizon: ST; Expected Impact: High.
    - Policy Response: Build consensus on critical policies to form government and accelerate reforms for EU Fund disbursements.
  - Continued elevated credit growth: Relative Likelihood: High; Time Horizon: ST; Expected Impact: Medium.
    - Policy Response: Consider further increase in the CCyB and strengthen the macroprudential framework (BNB increased the CCyB to 2 percent from October 2023).

- Main recommendations from the 2022 Article IV and authorities’ actions:
  - IMF recommended shifting subsidies and discontinuing reduced VAT rates; authorities preserved some subsidies and have gradually discontinued some VAT reductions with some reduced rates extended till end-2024.
  - IMF recommended a holistic pension review and judicial/anticorruption reforms; authorities have not undertaken a holistic pension review and have initiated several judicial/anticorruption reforms.
  - BNB increased the CCyB to 2 percent from October 2023 and is monitoring rapid credit growth.

*Source: IMF staff report — "1. Fiscal Stance in 2023–24."*

### 1. Fiscal Stance in 2023–24 ________________________________________________________________________ 9

### 1. Fiscal Stance in 2023–24

### Key macroeconomic developments and indicators
- Real GDP growth slowed to 1.8 percent in 2023.
- Private consumption gained momentum in 2023, supported by real wage growth exceeding 5 percent.
- Net exports contributed positively to growth; private investment declined and the inventory buildup of 2021–22 sharply reversed.
- Unemployment was 4.3 percent in 2023:Q4.
- Headline inflation decelerated to 3.1 percent in March 2024.
- Core inflation remained stickier at 3.9 percent (core excluding energy, food, alcohol, and tobacco); services prices still growing by 5 percent.
- Current account was close to balance; investment income payments increased by 46 percent.
- Gross international reserves increased with higher capital account surplus and financial account balance.
- Banking sector: double-digit private credit growth since March 2022, driven notably by mortgages; banking system well capitalized and liquid with record profits in 2023; non-performing loans at 4.4 percent of total loans in February.
- BNB policy context: currency board tied to the euro; the BNB announced increases in the base rate in line with the ECB. Minimum reserve requirement (MRR) currently 12 percent; ECB MRR currently 1 percent.

### Fiscal developments in 2023 and 2024
- Fiscal deficit on a cash basis increased by 2.3 percentage points to 3.1 percent of GDP in 2023. (Footnote: "This deficit includes an advance payment (0.7 percent of GDP) for municipal projects (Box 1).")
- Public debt at 22 percent of GDP (second lowest in the EU, Annex I).
- Revenue declined by 2.2 percent of GDP in 2023, primarily due to weaker nontax revenues, VAT, and grants.
- Expenditure remained stable in percent of GDP in 2023 despite higher spending on pensions, wages, and investment, largely owing to a significant reduction in the cost of electricity subsidies.
- Box 1 notes an advance payment of 1.2 billion leva (0.65 percent of GDP) for municipal projects recorded as capital investment but transferred to a special account outside general government.
- The 2024 budget projects expenditure to increase by 1.3 ppts of GDP, driven by social spending (notably an 11-percent increase in pensions) and public investments largely financed by EU funds.
- The budget assumes an optimistic 0.4 percent of GDP revenue increase from improved tax collection and sets dividends of state-owned companies at 100 percent of their profits.
- Revenue-raising measures in the 2024 budget are largely ad-hoc; the increase in the maximum insurable income (cap on social contributions) is described as a welcome but insufficient first step.

### Macroeconomic outlook and projections
- Baseline: growth expected to accelerate to 2.7 percent in 2024, assuming stabilization of the inventory cycle and EU funds delivery.
- Private investment projected to remain subdued and constrain growth below potential; more robust recovery expected from 2025 with anticipated euro adoption and reduced domestic uncertainty.
- Continued fall in global food and energy prices projected to support a decrease in headline inflation and spill over to core; decline in core inflation slowed by sustained wage and pension growth and the expansionary 2024 budget.
- Long-term: growth expected to decelerate to about 2½ percent, reflecting a declining working-age population, lower investment than peers, and low productivity growth.
- Current account projected to persistently register small deficits despite projected steady improvement in the terms of trade.
- Current policies aim to keep the fiscal deficit at 3 percent of GDP throughout 2029.
- Public debt expected to reach about 30 percent of GDP in 2029.

### Risks and uncertainty
- Considerable uncertainty and downside risks from global and heightened domestic political and policy uncertainties.
- Potential for protracted political instability if June 2024 elections do not yield a clear majority, which could hamper policymaking, undermine confidence and investment, and delay NGEU funds disbursement.
- Less-than-full absorption of NGEU funds by the 2026 deadline would hinder growth, green transition, and income convergence.
- Delay in euro adoption beyond 2025 could negatively affect sentiment and investment.
- Persistent elevated credit growth could deteriorate asset quality and engender a house prices–mortgage credit spiral.
- Continued wage growth outpacing productivity could undermine competitiveness and drag growth.
- External risks: weaker-than-expected pickup in trading partners’ demand or intensification of regional conflicts that increase commodity prices and rekindle inflation.
- Positive scenario: timely euro area accession likely to boost confidence and spur investment.

### Assessment of fiscal stance and policy priorities
- Staff view: 2024 budget is expansionary; a neutral fiscal stance in 2024 would strike an appropriate balance between supporting the expected small rebound in growth and not jeopardizing disinflation.
- Staff estimates fiscal policy contributed 1.3 ppts of inflation in 2021 and about 3 ppts in 2022; fiscal policy likely helped somewhat reduce demand pressures in 2023.
- Achieving a neutral fiscal stance in 2024 would mean reducing the planned deficit by about 1 percentage point of GDP.
- On an accrual basis, both traditional CAPB and CAPB excluding EU grants indicate contractionary stance in 2023; on cash basis measures (with adjustments) 2023 is assessed as slightly tight to slightly expansionary depending on adjustments (Box 1). In 2024, all accrual and adjusted cash measures indicate an expansionary stance.
- Authorities’ view: broadly agree with the outlook and risks; authorities see disinflation on track for joining the euro in 2025 under current fiscal policy and estimate the price stability criterion will be met in late 2024.

### Policy recommendations and reform priorities
- Short-run: policies should secure disinflation with minimal impact on growth; maintain cautious fiscal policy while supporting the recovery.
- For 2024 fiscal stance, staff recommends achieving neutrality preferably through measures that permanently raise revenue rather than cuts to investment.
- Specific revenue and fiscal measures suggested:
  - Fully reverse reduced VAT rates that are no longer necessary.
  - Eliminate the cap on social contributions.
  - Increase personal income tax (PIT) rates.
  - Complement revenue measures with policy-driven reductions in subsidies.
- Avoid cutting investment as the primary fiscal adjustment variable to preserve long-term growth prospects.
- Medium- and long-run fiscal and structural reforms:
  - Raise spending efficiency by improving fiscal transparency, public investment management, and governance, including procurement (e.g., publishing beneficial ownership information of contract awardees).
  - Strengthen capacity to absorb EU funds.
  - Improve efficiency in social spending (social protection, health, education) to improve social protection coverage and human capital.
  - Conduct a comprehensive review of public wages to inform wage policy.
  - Increase financial sustainability of the pension system while improving pension adequacy; address rising pension system deficits covered by large fiscal transfers that crowd out productive spending (see Box 2 referenced for pension reforms).

*Source: IMF staff report — "1. Fiscal Stance in 2023–24."*

### Box 2. Pension System: Adequacy and Sustainability

### Box 2. Pension System: Adequacy and Sustainability

### Pension adequacy: current situation and indicators
- The Bulgarian pension system has been marred for years by a financial situation unsustainable on its own, thus requiring sizable budgetary transfers, and pension levels that keep many elderlies in poverty.
- During the pandemic, more than half of the fiscal support provided to households targeted pensioners. As a result, pension adequacy increased noticeably.
- Still, although declining, old-age and pensioners poverty remains high by EU standards.
- The minimum pension (received by almost half of pensioners at end-2023):
  - is close to the official poverty line;
  - is equivalent to about 60 percent of the minimum wage;
  - is less than a one-quarter of the average wage.
- At-risk-of-poverty measure: cut-off point is 60 percent of median equivalized income after social transfers (source: NSSI, Eurostat, and IMF staff calculation).

### Fiscal costs and sustainability signals
- The increase in pensions was not matched by adequate revenue measures. As a result, fiscal transfers to cover the deficit increased to reach 5½ percent of GDP.
- Selected reported figures (as presented):
  - Payments to pensioners: 5.7, 4.6, 2.6, 2.5, 0.3, 0.4
  - Numbers of pensioners: 1.3, 2.0, 1.3, 0.0, 0.1, 0.1
  - Contributions at maximum insurable income as a share of total contributions: 13.6, 15.2, 17.8, 18.2, 21.1, 21.2
  - Number of contributors: 6.4, 8.4, 10.9, 11.1, 14.2, 14.2
- Pension spending (payment to pensioners) and fiscal transfers time series are reported in percent of GDP (sources: NSSI, Eurostat, IMF staff calculation).

### Key staff recommendations to improve adequacy and sustainability
- Increase incentives to contribute by:
  - introducing in the benefit formula a direct link with contributions actually paid;
  - eliminating the ceiling on contributions (the “maximum insurable income”), which has grown more slowly than wages, leading to substantial forgone revenue and making social contributions regressive;
  - eliminating the ceiling on pensions (which only marginally limits pension payments);
  - increasing the contribution rate, which is comparatively low.
- Reform the tax system to make it fairer and address rising spending needs:
  - Raising the CIT rate to 15 percent for big multinational corporations will help, but revenue gains will be limited.
  - Moving from the low flat corporate and personal income tax rates of 10 percent to higher and progressive (for PIT) rates would help reduce inequalities and raise more revenue.
  - Increasing coverage of carbon taxation would help achieve emission targets and generate revenues to spur green investment and support vulnerable households affected by the transition.
- Address informality and widen tax bases:
  - Ensure compliance of large taxpayers and in high-risk sectors, strengthen control and auditing processes, and further train tax administration staff on operational risks.
  - Carefully handle the planned merger of National Revenue Agency and Custom Agency to ensure quality of core functions.
  - Strengthen governance and reduce corruption to enhance trust and improve tax compliance.
- Prevent buildup of contingent liabilities from SOEs and pursue SOE governance reforms (see discussion of SOE fiscal risks in accompanying material).

### Authorities’ views
- Authorities broadly agreed on the need for fiscal reforms but cautioned against moving to progressive personal income taxation at this stage.
- They emphasized sequencing fiscal reforms carefully to ensure short-term fiscal costs and benefits do not deteriorate outcomes and that reforms are politically and socially feasible.
- Authorities are not convinced that Bulgaria is at a stage when introducing progressive taxation would be desirable and are concerned that raising the marginal taxation rate would lead to further tax evasion; they see the need to further assess macroeconomic, distributional and fiscal impacts.

*Source: Box 2. Pension System: Adequacy and Sustainability (from the supplied IMF content).*

### Box 4. Integration in Global Value Chains

### Box 4. Integration in Global Value Chains

### Overview of Bulgaria’s GVC integration
- Bulgaria’s integration in GVCs has flattened in the last decade after twenty years of growth before the global financial crisis.
- Bulgaria’s GVCs are well diversified, although still mostly concentrated in low-technology, labor-intensive industries.
- Both forward linkages (i.e., domestic value-added content of foreign exports) and backward linkages (i.e., foreign value added embodied in domestic exports) with the EU are among the lowest compared to other EU newer member states (NMS).
- Links with Russia have been historically large, especially in fuel and energy products, but decoupling is ongoing after Russia’s invasion of Ukraine.
- To boost integration, Bulgaria should invest in infrastructure and improve governance. Fostering innovation through R&D will also help.
- As domestic wages rise, it is important that Bulgaria focuses on non-price elements of its economy to remain competitive and benefit from a deeper integration with EU partners.

### Sectoral focus and measures of integration
- Integration in GVCs is computed as the sum of backward linkages and forward linkages.
- Information industries include production of computers and electronics and the provision of communication, IT, and information services.
- Forward Linkages in Information Industries are reported as shares of exports (percent) in the underlying analysis.
- Sources used for the analysis: OECD Trade in Value Added, 2023, and IMF staff calculations.

### Drivers of GVC integration and Bulgaria’s positioning
- Drivers are quantified using a weighted average of SHAP values from six machine learning models (linear regression, elastic net, support vector machine, random forest, extreme gradient boosting and k-nearest neighbors), estimated with data for EU countries over 2002-20.
- Variables are considered in percent of EU average; boxplots show the distribution of the centered and normalized indicators for all EU countries.
- Key drivers identified in the analysis include:
  - Road infrastructure
  - Rule of law
  - Manufacturing (%...)
  - Population with...
  - R&D (% GDP)
  - Private credit (% GDP)
  - Internet connectivity
  - Dummy for crisis
  - Real wages
- Staff’s analysis shows that infrastructure and governance are particularly important drivers of integration and are lagging in Bulgaria.

### Policy recommendations to deepen GVC integration
- Invest in infrastructure and improve governance to boost integration in GVCs.
- Foster innovation through R&D to move toward higher-technology activities.
- As domestic wages rise, focus on non-price elements of competitiveness to deepen integration with EU partners.

### Related governance, AML/CFT, and energy considerations affecting integration
- Strengthening governance and mitigating corruption are necessary to support GVC integration; public procurement is an area seen as being at high risk of corruption.
- The RRP prioritizes anti-corruption and rule-of-law reforms; constitutional amendments in 2023 aimed to restrict the power of the Prosecutor General, restructure the Supreme Judicial Council, ensure transparent selection of regulators, and reduce the role of the President in appointing caretaker governments.
- Bulgaria entered the FATF “grey list” in 2023 and committed to an action plan to address strategic deficiencies; swift implementation of the plan is important given potential negative economic consequences.
- Energy developments relevant for integration:
  - Bulgaria pivoted away from Russian gas when Russia abruptly cut its supply in the spring of 2022.
  - It is replacing Russian nuclear fuel with U.S. fuel.
  - Dependence on Russian oil increased under a derogation from the EU embargo but is expected to decline as the exemption ended in 2024Q1.
  - The European Commission will provide over 1 percent of GDP to help phase out coal and reach energy and climate targets following adoption of Bulgaria’s Territorial Just Transition Plans.
- Maintaining incentives for energy saving and efficiency, investment in renewables, and reduction of coal use through price-based mechanisms and fiscal tools should be considered, while protecting vulnerable households.
- Increased production of green energy would strengthen energy security and could be fostered by a review of regulation and addressing the bottleneck that limit the connection to the grid.

*Source: IMF staff analysis as presented in Box 4. Integration in Global Value Chains.*

### 39.      It is recommended that the next Article IV consultation be held on the standard 12-

### 1bgrea2024001 - 39.      It is recommended that the next Article IV consultation be held on the standard 12-

### Real sector developments
- Policy recommendation:
  - It is recommended that the next Article IV consultation be held on the standard 12-month cycle.
- 2023 outcomes and recent dynamics:
  - Real GDP growth in 2023: 1.8
  - Growth weakened in 2023, although less than peers.
  - Retail sales held up while industrial production contracted.
  - Business confidence has yet to return to pre-pandemic levels.
  - Unemployment rate ticked up but remains low; unemployment rate (2023): 4.4 percent of labor force.
  - Real wage growth remained robust; nominal wages (2023): 13.7 percent.
- Inflation:
  - HICP inflation (average) 2023: 8.6 percent
  - HICP inflation (end of period) 2023: 5.0 percent
  - Core HICP (average) 2023: 8.9 percent
  - Core HICP (end of period) 2023: 5.4 percent
  - Inflation declining rapidly driven by energy and food prices, while services price growth remains elevated.

### External sector developments
- Current account and trade:
  - Current account balance (2023, percent of GDP): -0.3
  - The current account deficit that appeared during the pandemic has gradually diminished.
  - Exports and imports declined as the drop in volume was magnified by a drop in prices.
- Balances and positions:
  - Net international investment position (NIIP) continued to improve; NIIP (2023, percent of GDP): -7.6
  - Financial account driven by FDI and Eurobond issuance.
- Reserves:
  - Gross international reserves (2023, billions of euros): 41.9 (Table 2 memorandum)
  - Gross international reserves were stable in 2023.

### Fiscal developments
- Fiscal balances and debt:
  - General government net lending/borrowing (cash basis) 2023: -3.1 (percent of GDP)
  - General government primary balance 2023: -2.6 (percent of GDP)
  - Structural overall balance 2023: -3.2 (percent of GDP)
  - General government gross debt 2023: 22.0 (percent of GDP)
  - Fiscal deficit increased in 2023 as revenue fell while expenditure remained stable.
  - Public debt remained broadly stable and continues to be among the lowest in the EU.
- Revenues and expenditures (2023, percent of GDP):
  - Revenue 2023: 34.7
  - Expenditure 2023: 37.8
  - Social benefits (2023, percent of GDP): 16.2
  - Current primary revenue components and growth of selected expenditure items noted in figures.
- Fiscal reserves:
  - Fiscal reserve account (2023, percent of GDP): 10.4
  - Fiscal reserves remained broadly unchanged in 2023.

### Monetary and financial sector developments
- Credit and lending:
  - Total credit growth accelerated in recent data, led by mortgage loans.
  - Domestic private credit (2023, percent change): 12.2 (Table 1)
- Interest rates and yields:
  - Mortgage rates declined; Euribor-linked interest (and deposit) rates for NFIs increased.
- Banking sector soundness:
  - Bank profitability recorded high levels; Return on assets (2023Q4): around the high single digits in the series (Figure 4 shows Return on Assets and Return on Equity, with Return on Assets series values).
  - Banking sector remains well capitalized and liquid.
  - Capital adequacy ratios and liquidity indicators remain strong relative to peers.
  - Nonperforming loans remain comparatively high but continue to decline; NPL to total gross loans latest available data: 3.6 percent (Table 6 shows NPL series ending at 3.6).
- Monetary aggregates and reserves:
  - Broad money growth 2023: 8.7 percent (Table 1)
  - Reserve money (2023, billions of leva): 59.1 (Table 5)
  - Net foreign reserves (billions of euro, BNB accounts) 2023: 39.9 (Table 5)

### Macroeconomic projections and key indicators (selected)
- Growth and demand:
  - Real GDP projections: 2024: 2.7; 2025: 2.9; 2026: 2.9; 2027: 2.7; 2028: 2.7; 2029: 2.6 (Table 1 and Table 2)
  - Real domestic demand 2023: -0.9; 2024 projection: 3.9
- Prices and wages:
  - GDP deflator 2023: 7.5; 2024: 3.6; 2025: 3.4
  - Consumer price index (HICP, average) projections: 2024: 3.2; 2025: 2.7; 2026: 2.1; 2027: 2.0; 2028: 2.0; 2029: 2.0
  - Nominal wages projections: 2024: 8.9; 2025: 8.9; 2026: 8.0; 2027: 7.6; 2028: 7.6; 2029: 7.5
- External sector projections (percent of GDP):
  - Current account projections: 2024: -0.8; 2025: -1.8; 2026: -1.4; 2027: -0.7; 2028: -0.7; 2029: -0.7
  - Gross international reserves (billions of euros) projections: 2024: 46.1; 2025: 50.2; 2026: 53.2; 2027: 56.3; 2028: 63.4; 2029: 69.1
- Fiscal outlook (percent of GDP):
  - Revenue projections: 2024: 36.3; 2025: 36.3; 2026: 35.7; 2027: 35.7; 2028: 35.7; 2029: 35.6
  - Expenditure projections: 2024: 39.1; 2025: 39.2; 2026: 39.0; 2027: 38.4; 2028: 38.4; 2029: 38.3
  - General government net lending/borrowing projections: 2024: -2.7; 2025: -3.0; 2026: -3.4; 2027: -2.7; 2028: -2.7; 2029: -2.7
- Memorandum items:
  - Nominal GDP (billions of euros): 2023: 93.9; 2024: 100.0; 2025: 106.5; 2026: 112.3; 2027: 117.9; 2028: 123.8; 2029: 129.8 (Table 2)

*Source: IMF staff compilation from the Bulgaria country chapter content provided.*

### Annex I. Public Debt Sustainability Analysis

### Annex I. Public Debt Sustainability Analysis

### Overall Risk of Sovereign Stress and Sustainability Assessment
- Overall assessment: Low.
- Commentary:
  - "The overall risk of sovereign stress is low, reflecting a relatively low level of vulnerability in the near-term and medium term. Public debt is the second lowest in the EU and is sustainable."
  - Medium-term risks: Moderate mechanical signal but staff assessment = Low. "Medium-term risks are mainly associated with an upward trend in debt, caused by the sustained deficit. However, the upper bound of debt in the fanchart simulation remains below 60 percent of GDP by 2030. Staff's assessment of the medium-term risks is low."
  - Long-term risks: Moderate. "Long-term risks are moderate as aging-related expenditures on health and social security feed into debt dynamics."
  - Debt stabilization in the baseline: No.
  - DSA summary: "Bulgaria is at a low overall risk of sovereign stress. Public debt is sustainable and is the second lowest in the EU. In the medium term, the persistent deficit putting debt on an upward trend can be a concern. Nevertheless, debt remains below 60 percent of GDP. Over the longer run, Bulgaria should continue with reforms, particularly on the revenue side, to tackle fiscal risks arising from population aging associated with pension deficit."

### Debt Coverage, Disclosures, and Structure
- Coverage (baseline inclusion):
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): No
  - Social security funds (SSFs): Yes
  - State governments: Yes
  - Local governments: Yes
  - Public nonfinancial corporations: No
  - Central bank: No
  - Other public financial corporations: No
- Instrument/valuation notes:
  - Basis of recording: Not applicable
  - Valuation measures explained (nominal value, face value, market value definitions provided).
- Public debt structure indicators (general government perimeter):
  - Residual maturity: 6. years (labelled "Residual maturity: 6. years")
  - Charted metrics include debt by currency, debt by holder, debt by governing law (2023), debt by instruments, and debt by maturity; source: IMF staff estimates.

### Baseline Scenario (Percent of GDP unless indicated otherwise)
- Staff commentary: "The projection assumes that under no policy changes, the deficit will sustain. This results in an increase in debt over time. Even in this case, debt remains below 60 percent of GDP."
- Public debt path (selected years):
  - Actual 2023: 22.0
  - 2024: 23.4
  - 2025: 24.9
  - 2026: 27.0
  - 2027: 28.4
  - 2028: 29.7
  - 2029: 31.0
  - 2030: 32.2
  - 2031: 33.4
  - 2032: 34.6
  - 2033: 35.7
- Change in public debt (selected values shown row-wise):
  - 0.5; 1.4; 1.5; 2.0; 1.4; 1.4; 1.3; 1.2; 1.2; 1.2; 1.1
- Contribution of identified flows (primary components):
  - Contribution of identified flows: 1.2; 1.4; 1.5; 2.1; 1.4; 1.4; 1.3; 1.2; 1.2; 1.1; 1.1
  - Primary deficit: 2.6; 2.2; 2.2; 2.4; 1.7; 1.7; 1.6; 1.6; 1.6; 1.6; 1.6
  - Noninterest revenues (selected): 34.7; 36.3; 36.3; 35.7; 35.7; 35.6; 35.6; 35.6; 35.6; 35.6; 35.6
  - Noninterest expenditures (selected): 37.3; 38.5; 38.5; 38.0; 37.4; 37.3; 37.2; 37.2; 37.2; 37.2; 37.2
  - Automatic debt dynamics: -1.4; -0.8; -0.7; -0.3; -0.3; -0.3; -0.4; -0.4; -0.4; -0.5; -0.5
  - Real interest rate and relative inflation (contribution): -1.0; -0.2; 0.0; 0.4; 0.4; 0.4; 0.4; 0.4; 0.4; 0.4; 0.3
  - Real growth rate (contribution): -0.4; -0.6; -0.7; -0.7; -0.7; -0.8; -0.7; -0.8; -0.8; -0.8; -0.9
  - Other identified flows and contingent liabilities: 0.0 across projections shown.
  - Contribution of residual: -0.7; 0.0; 0.0; -0.1; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
- Gross financing needs:
  - 4.7; 4.5; 4.7; 4.6; 4.3; 3.8; 4.9; 3.7; 7.2; 6.1; 7.0 (percent of GDP)
  - Of which: debt service (selected): 2.1; 2.3; 2.5; 2.3; 2.6; 2.1; 3.3; 2.1; 5.6; 4.5; 5.4
  - Local currency financing (selected): 0.3; 0.3; 1.8; 1.4; 0.9; 0.5; 1.1; 0.3; 1.7; 1.5; 1.3
  - Foreign currency financing (selected): 1.8; 2.0; 0.7; 0.9; 1.7; 1.6; 2.1; 1.8; 3.8; 3.0; 4.2
- Macro assumptions (Memo):
  - Real GDP growth (percent): 1.8; 2.7; 2.9; 2.9; 2.7; 2.7; 2.6; 2.6; 2.6; 2.6; 2.6
  - Inflation (GDP deflator; percent): 7.5; 3.6; 3.4; 2.4; 2.3; 2.2; 2.2; 2.2; 2.2; 2.2; 2.2
  - Nominal GDP growth (percent): 9.5; 6.5; 6.5; 5.4; 5.0; 5.0; 4.9; 4.9; 4.9; 4.9; 4.9
  - Effective interest rate (percent): 2.3; 2.5; 3.3; 4.3; 4.3; 4.0; 3.8; 3.6; 3.5; 3.5; 3.3; 3.2 (note: table header shows progression; preserved values as presented)

### Realism of Baseline Assumptions and Historical Track Record
- Commentary: "Realism analysis does not point to major concerns."
- Forecast track record metrics include public debt to GDP, primary deficit, r - g, exchange rate depreciation; percentile comparisons versus comparator group (Emerging Markets, Non-Commodity Exporter, Surveillance).
- Distributional evidences:
  - 3-year debt reduction percentile rank: 36.3 (noted in chart text)
  - 3-year adjustment in cyclically-adjusted primary balance: percentile rank 58 (chart text)
- Fiscal multiplier scenarios shown for growth paths with multipliers = 0.5; 1; 1.5 in relation to fiscal adjustment.

### Medium-Term Risk Assessment (Indices and Signals)
- Debt Fanchart Module:
  - Terminal debt-to-GDP: 18.6; Fanchart width: 0.6 (presented as "43.5 0.6" where 43.5 is labeled in table—preserve shown values and context)
  - Probability of debt non-stabilization: 99.9; 0.8 (table shows "99.90.8")
  - Debt fanchart index (DFI): 1.9
  - Risk signal: Moderate (DFI reference: low if < 1.13; high if > 2.08; otherwise moderate)
- Gross Financing Needs (GFN) Module:
  - Average baseline GFN: 4.5; 1.5 (table "4.51.5")
  - Banks' claims on the govt (pct bank assets): 9.1; contribution 3.0
  - Change in banks' claims in stress (pct bank assets): 4.0; contribution 1.3
  - GFN financeability index (GFI): 5.8
  - Risk signal: Low (GFI signal thresholds: low if < 7.6; high if > 17.9)
- Medium-term index:
  - Debt fanchart index (normalized) contribution: 1.87
  - GFN financeability index (normalized) contribution: 5.80
  - Medium-term index: normalized aggregation yields Final assessment: Low risk (table indicates final assessment and charts show medium-term index in low range).
- Probabilities (2024–2029):
  - Prob. of missed crisis, if stress not predicted: 18.2 pct.
  - Prob. of false alarms, if stress predicted: 39.8 pct.

### External Sector Assessment (Annex II summary points)
- Overall assessment (2023): "Based on preliminary data, the external position in 2023 is assessed to be moderately stronger than implied by medium-term fundamentals and desirable policies. However, this assessment is subject to frequent and large data revisions."
- Current account:
  - Expected to record a small deficit over the projection period (except in 2025 due to the imports of military fighter jets).
  - Historical pattern: surpluses 2013–2019; deficit 1.7 percent of GDP in 2021; deficit 1.4 percent of GDP in 2022; preliminary 2023 deficit 0.3 percent of GDP.
  - Staff estimate: 2023 cyclically-adjusted current account is 2.0 percent of GDP higher than the norm (norm estimated at - 1.1 percent of GDP).
  - Data uncertainty: High due to frequent and substantial revisions; unidentified residuals are large.
- Foreign assets and liabilities (Position and Trajectory):
  - NIIP history: From trough of -92 percent of GDP in 2010 to -7.6 percent in 2023.
  - 2023 NIIP and components (percent of GDP):
    - NIIP: -7.6
    - Gross Assets: 91.7
    - Debt Assets: 14.0
    - Gross Liabilities: -99.4
    - Debt Liabilities: -9.3
  - Projection: NIIP to improve to -5.2 percent of GDP by end-2024 and further improve to turn positive over the medium term as assets (portfolio assets, reserves) grow faster than liabilities.
  - Assessment of vulnerabilities: "Overall NIIP financing vulnerabilities appear low, as foreign direct investment accounts for a large share of the position."
- Real Effective Exchange Rate (REER) and competitiveness:
  - Wage growth has outpaced productivity; ULC-based REER deviated from CPI-based REER and appreciated since 2009.
  - 2023 REER gap assessment ranges: staff assesses REER gap in the -4.4 to 8.0 percent range.
  - EBA-Lite 3.0 model: REER overvaluation of 9.7 percent.
  - CA-gap derived REER (with elasticity -0.44): implies REER undervaluation of 4.4 percent.
  - Overall assessment subject to high uncertainties related to data issues.
  - CA model details (selected):
    - CA-Actual: -0.3
    - Cyclical contributions (from model): 0.1
    - Natural disasters and conflicts adjustment: -1.2
    - Adjusted CA: 0.9
    - CA Norm (from model): -1.1
    - Adjusted CA Norm: -1.1
    - CA Gap: 1.9; REER Gap (in percent): -4.4; alternate REER gap items: 8.0; -6.4 (tabulated ranges preserved)
- Capital and financial accounts; external debt and amortization:
  - Gross external-debt-to-GDP ratio declined over last decade; 2023 ratio about half of 2013 level.
  - 2023 projected net financial balance: -2.3 percent of GDP driven by net inflow of FDI (-3.3 percent of GDP) (based on preliminary BOP data).
  - High share of long-term debt in gross external debt: 81.6 percent as of end-2023.
  - Amortization and borrowing (Millions of Euros; Projections):
    - Amortization: 2,648; 3,117; 261; 256; 2,259; 2,232; 3,771 (years shown 2022–2028 in chart context)
    - Percent of GDP (amortization): 2.8; 3.0; 0.3; 0.2; 2.2; 2.2; 3.7
    - Borrowing 1/ Millions of Euros: 7,277; 7,843; 8,312; 9,114; n.a.; n.a.; n.a.
    - Borrowing Percent of GDP: 7.6; 7.7; 8.1; 8.9; n.a.; n.a.; n.a.
    - Note: "1/ No Short-term borrowing" (source: Ministry of Finance and IMF Staff calculations).
  - Amortization of public external debt in 2024 secured by borrowing in 2023 and will decline significantly in 2025 and 2026.
  - External-debt-to-GDP ratio projected to decline over projection period as planned public borrowing increase is smaller than nominal GDP growth.
- Foreign exchange reserves and FX intervention:
  - Gross international reserves at end-2023: EUR 41.9 bn (44½ percent of GDP), up from EUR 38.4 bn at end-2022.
  - Assessment: Reserves adequate under a currency board arrangement.
  - "Available FX reserves are expected to exceed the upper bound of the IMF metric’s suggested adequacy range and the coverage ratio required for the functioning of the currency board, while remaining well above traditional metrics."
  - Reserves vs. traditional metrics charts presented; suggested adequacy range noted.

### Potential Policy Responses and Recommendations (as stated)
- Fiscal and structural policy:
  - Continue reforms, particularly on the revenue side, to tackle fiscal risks arising from population aging associated with pension deficit.
  - Ensure that the external position remains consistent with medium-term fundamentals by implementing structural policies to foster investment, raise Bulgaria’s potential growth, facilitate its economic transformation, and ensure that the expected euro accession brings all the potential benefits.
  - Make effective and efficient use of EU funds, which are large but have been delayed.
- Reserve and financing policy:
  - Maintain FX reserves adequate for the currency board arrangement and manage public external borrowing so amortization pressures are covered.

*Source: IMF staff estimates, assessments, and projections (Annex I and Annex II excerpts).*

### Annex III. Risk Assessment Matrix

### Annex III. Risk Assessment Matrix

### External Risks — key risks, likelihood, horizons, impacts, and policy responses
- Intensification of regional conflicts
  - Relative Likelihood: High
  - Time Horizon: ST
  - Expected Impact: Medium
    - Main channels: lower external demand from Europe; direct energy and trade links with Russia and Ukraine have decreased and financial links are extremely low.
    - Disruptions of commodity trade would rekindle inflation from higher commodity prices.
  - Policy Response:
    - Fiscal stimulus and well-targeted, temporary support for groups most vulnerable to lower growth and higher inflation.

- Commodity price volatility
  - Relative Likelihood: High
  - Time Horizon: ST, MT
  - Expected Impact: Medium
    - Commodities have a large weight in the CPI basket and a sharp rise in their price would trigger a substantial increase in inflation.
    - Adverse terms of trade shock would weaken the external position.
  - Policy Response:
    - Targeted and temporary support for the most vulnerable groups should be offset to avoid a larger fiscal deficit that further fuels inflationary pressures.

- Abrupt global slowdown
  - Relative Likelihood: Medium
  - Time Horizon: ST, MT
  - Expected Impact: High
    - A sharp downturn in key trading partners would dampen economic growth and weaken external position.
    - Supply disruptions could increase commodity prices and reignite inflationary pressures. A steep correction of the real estate price may weaken the financial sector.
  - Policy Response:
    - With a low external debt, a fiscal stimulus and targeted support for the most vulnerable groups would be possible provided that access to international financial markets is secured and inflation is not a renewed concern.
    - Preemptively reduce emerging real estate risks for the financial system and deploy available capital buffers to absorb credit losses.

- Monetary policy miscalibration
  - Relative Likelihood: Medium
  - Time Horizon: ST, MT
  - Expected Impact: Medium
    - Risk that major central banks loosen policy prematurely, hindering disinflation, or keep it tight for longer than warranted, causing abrupt adjustments in financial markets and weakening credibility.
  - Policy Response:
    - Under the currency board, the monetary policy setting is beyond the direct control of the BNB.
    - Breaking the effects of a wage-price spiral would require discretionary fiscal tightening and a consensus on multi-year wage restraint.

- Systemic financial instability
  - Relative Likelihood: Medium
  - Time Horizon: ST, MT
  - Expected Impact: Medium
    - High interest rates and risk premia and asset repricing amid slowdown and political uncertainty could trigger market dislocations, cross-border spillovers, and an adverse macro-financial feedback loop affecting weak banks; NPLs and default rates may increase.
  - Policy Response:
    - With a large share of the banking sector being foreign owned, the BNB should increase monitoring, strengthen macroprudential policy for ex-ante risk prevention, and ensure a well-functioning financial crisis management framework.

Notes on risk classification:
- The RAM’s relative likelihood definitions: “low” indicates a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent.
- Conjunctural shocks and scenario risks may materialize over a shorter horizon (between 12 to 18 months); structural risks remain salient over a longer horizon.

### Bulgaria-Specific Risks — likelihoods, impacts, and policy responses
- Political uncertainty (post-parliamentary election of June 9th)
  - Relative Likelihood: High
  - Time Horizon: ST
  - Expected Impact: High
    - Political stalemate hampers policy making, protracted uncertainty undermines confidence, and insufficient progress in reforms delays NGEU grants delivery.
  - Policy Response:
    - Seek to build up a consensus on critical policies to allow the formation of a ruling government and accelerate reforms necessary for EU Fund disbursements.

- Longer delay in euro adoption
  - Relative Likelihood: High
  - Time Horizon: ST, MT
  - Expected Impact: Medium
    - Further postponement may negatively affect economic sentiment and weaken domestic demand.
  - Policy Response:
    - Adjust the communication strategy to reiterate the goal of joining the euro and conduct a fiscal policy consistent with reducing demand pressures.

- Continued elevated credit growth
  - Relative Likelihood: High
  - Time Horizon: ST
  - Expected Impact: Medium
    - Persisting elevated credit growth could deteriorate asset quality and engender a house prices-mortgage credit spiral.
  - Policy Response:
    - Consider further increase in the CCyB and strengthen the macroprudential framework by introducing borrower-based measures to help uphold asset quality.
    - Note: The BNB increased the CCyB to 2 percent from October 2023 to help reduce liquidity in the banking system and bolster buffers; the BNB is monitoring rapid credit growth and considers home valuation moderate, borrowers’ indebtedness low, credit standards high, and capital buffers ample.

### Main Recommendations of the 2022 Article IV Consultation and Authorities’ Actions (Annex IV)
- Fiscal policy recommendations and actions
  - IMF recommendation: Existing subsidies to companies and price caps should be gradually shifted to direct support to vulnerable households.
  - Authorities’ action: The 2024 budget preserves the subsidy for business, justifying it by the need to keep inflation in check.
  - IMF recommendation: The reduction in VAT rates should be discontinued, as the measure is regressive and no longer needed.
  - Authorities’ action: VAT rate reduction is gradually discontinued. Some reduced rates remain in place but authorities planned to eliminate them by mid-year (tourist services and sport facilities as well as flour and bread) while other reduced rates were extended till end 2024 (restaurants and hotels).
  - IMF recommendation: Planned medium-term fiscal consolidation should be accompanied by expenditure and revenue-management reforms to increase efficiency of public spending and review taxation.
  - Authorities’ action: The authorities received IMF technical assistance for reform of the revenue administration, but implementation of recommendations was delayed by the political situation; Bulgaria benefitted from TADAT reports. No other fiscal reform progressed.

- Structural reforms
  - IMF recommendation: A holistic review of the pension system.
  - Authorities’ action: No holistic review undertaken.
  - IMF recommendation: Steadfast efforts to improve the effectiveness of the judicial and anticorruption systems.
  - Authorities’ action: Several reforms have been initiated (see referenced paragraphs in the main report).

- Financial sector policies
  - IMF recommendation: Continue to monitor asset quality and ensure banks proactively manage risks and maintain strong capital positions.
  - Authorities’ action: The BNB increased the CCyB to 2 percent from October 2023 and is monitoring rapid credit growth; assesses home valuation as moderate, borrowers’ indebtedness low, credit standards high, and capital buffers ample.

### Data Issues and Data Standards (Annex V)
- Data adequacy assessment highlights (Table 1)
  - Overall: The data provided to the Fund is adequate for surveillance.
  - Specific note: Frequent and large revisions of the BOP and large errors and omissions require caution in analysis and limit the relevance of the EBA assessment.
  - Corrective actions priority: More detailed information on budgetary flows between budget and SOEs would help identify and monitor fiscal risks.

- Data Standards and dissemination
  - Bulgaria adheres to the Special Data Dissemination Standard (SDDS) Plus since May 2016 and publishes data on its National Summary Data Page.
  - As of April 15, 2024, Table of Common Indicators Required for Surveillance is maintained; selected items show dates of latest observation and frequency codes as presented in the source tables.

*Source: 1bgrea2024001 - Annex III. Risk Assessment Matrix*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1bgrea2024001.pdf_