## Real Sector Developments, 2008–16

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### Context and Main Challenges
- Bulgarian economy resilient to shocks (2014 domestic bank failure; 2015 Greek spillovers) with steadily improving macro conditions.
- Key macro outcomes:
  - Output gap is narrowing.
  - Unemployment continues to decline.
  - Current account broadly in line with fundamentals.
  - Fiscal balance improved significantly in 2015; outturn through August 2016 points to considerable overperformance in 2016.
  - Public debt increased noticeably in 2014 but remains among the lowest in Europe.
  - Non-financial corporate sector debt remains high, with a significant share consisting of inter-company debt.
- Main challenges:
  - Solidifying financial stability.
  - Raising potential growth (per capita income on a PPP basis remains less than half of the EU-28 average).
  - Addressing fiscal costs of aging and emigration.
- Drivers of lower potential growth since the global financial crisis:
  - Declining investment.
  - Diminishing productivity gains.
  - Adverse demographic trends.
- Policy priorities:
  - Improve infrastructure and accelerate structural reforms (notably in the energy sector and state-owned enterprises).
  - Strengthen financial sector measures implemented after the 2014 bank failure.
  - Undertake reforms to protect long-term fiscal sustainability in face of rising health and pension spending pressures.

### Recent Economic Developments — Real, Prices, Labor, External
- Real output and demand:
  - Real output grew by 3 percent in 2015.
  - GDP continued to grow at around 3 percent during the first half of 2016.
  - Private consumption overtook exports as main driver; EU-fund related public investment slumped.
- Inflation and prices:
  - Deflation largely driven by international commodity prices; energy and commodity prices have larger weight in Bulgaria’s HICP basket than in the euro area.
  - Most recent data point to gradual easing of deflation.
- Labor market and wages:
  - Unemployment rate declined to 8.2 percent in Q2 2016 (LFS-based).
  - Nominal private sector wages rose by around 10 percent in 2015 and by about 8 percent year-on-year during H1 2016.
  - Monthly minimum wage: €189 on average in 2015; increased to €215 in January 2016.
  - Minimum wage increases: 8.6 percent in 2015; 13.6 percent in January 2016.
- External sector:
  - Current account surplus: 1.4 percent of GDP in 2015; 2.8 percent of projected 2016 GDP during January–July 2016.
  - FDI subdued.
  - External debt: about 77 percent of GDP at end-July 2016.
  - Reserves: 159 percent of the standard IMF metric in 2015 (slightly above the 100–150 percent range considered appropriate).
  - Competitiveness notes:
    - HICP-based real exchange rate moved in line with peers.
    - ULC-based real exchange rate appreciated faster than peers; competitiveness concerns if wages continue to grow faster than productivity.

### Outlook and Risks (staff projections and risk matrix)
- Growth projections:
  - Real GDP growth projected at 3 percent in 2016 and around 2½ percent in the medium term.
  - Near-term drivers: private consumption; public investment expected to contract in 2016; private investment expected to recover.
  - Medium-term constraints: slow structural reform progress, limited productivity growth, modest investment, shrinking labor force from emigration and aging.
  - Projected medium-term growth considerably below CESEE averages and below what is needed for desirable income convergence.
- Risk Assessment (selected, Risk Assessment Matrix as of September 28, 2016):
  - Weak progress in structural reforms (short/medium term): Relative Likelihood: High/Medium; Impact if Realized: High.
  - Inadequate follow-up on AQR and stress test weaknesses (short term): Relative Likelihood: Medium/Low; Impact if Realized: High/Medium.
  - Protracted slower euro-area growth and deflation (short/medium-term): Relative Likelihood: High/Medium; Impact if Realized: High.
  - Instability in Turkey: Relative Likelihood: Medium; Impact if Realized: High.
  - Brexit-related uncertainty (short/medium-term): Relative Likelihood: Medium; Impact if Realized: Medium.
  - Significant slowdown in large EMs (short/medium-term): Relative Likelihood: Medium; Impact if Realized: Medium.
- Authorities’ view: expected slightly lower near-term growth but higher medium-term growth than staff; risks broadly balanced with downside risk from Turkey instability.

### Policy Focus Areas (from report)
- Financial stability: banking sector AQR and stress test, reforms to strengthen supervision, resolution, and deposit insurance.
- Growth prospects: medium-term growth drivers, emigration, SOEs in infrastructure sectors.
- Long-term fiscal sustainability: recent fiscal developments and demographic-related spending pressures and options.

---

### Banking System Outlook, AQR, Stress Test, and Reform Priorities

### Banking system and credit provision
- Private sector credit growth tepid since the global financial crisis despite high capital adequacy and high liquidity.
- Access to financing ranked number one concern for business (WEF Global Competitiveness Report); binding for innovation and SMEs.
- Legal and institutional weaknesses in debt resolution and restructuring constrain lending and investment.
- Authorities interested in continuous assessment and monitoring of debt resolution processes, focusing on insolvency.

### 2015 stress episode and crisis management
- 2015 stress from Greek spillovers was managed successfully; system remained stable.
- About 3 percent of system deposits redistributed from Greek-affiliated banks to other banks.
- Crisis-management measures: daily reporting of liquidity and deposits; higher liquidity requirements (30 percent) for Greek affiliate banks; requirement to reduce cross exposures; prohibition of dividend distribution and repayment of subordinated debt.
- Sale of Alpha Bank’s branches to Eurobank’s Bulgarian subsidiary in March 2016 strengthened BNB leverage.

### AQR and stress test findings (transparency and capital)
- AQR adjustments in aggregate: 1.3 percent of risk-weighted assets (BGN 665 million) to be reflected in banks’ end-2016 financial statements.
- Foreign-owned banks represent 76 percent of total system assets and remain well-capitalized post-AQR.
- Significant bank-specific differences: First Investment Bank (FIB, ~10 percent of system assets) and two small banks found to have shortfalls against BNB-required capital buffers.
- Additional buffers may be needed to cover Pillar II capital requirements and risk profiles highlighted by Stress Test.

### Recovery strategies and supervisory expectations
- Bank recovery strategies should restore credibility in identified banks:
  - One small bank has already raised capital.
  - Other two banks pursuing private solutions to restore capital by mid-2017.
- Sourcing equity from new bona fide investors recommended; BNB must be confident capital is not borrowed.
- Authorities should comply with timelines and be ready to intervene if banks fail to restore required capital buffers.
- At this stage, neither bank resolution nor public support is envisaged.

### Areas needing continued reform (identified)
- Asset quality:
  - NPL ratio as of 2016Q1: 14½ percent (EBA definition), more than double the EU average.
  - EBA-lite/ AQR helped identify NPLs and provisioning; further efforts needed to reduce NPLs, especially for lower-capital banks.
  - Recommended measures: explicit operational targets for loan restructurings; remove impediments to releasing collateral (judicial bottlenecks, lack of out-of-court workout mechanisms); promote effective write-offs within reasonable time frame.
- Bank governance:
  - Strengthen transparency of groups’ operational and ownership structures, stricter rules on ultimate beneficial owners and related parties; upgrade Boards’ governance and involvement in risk appetite.
- Bank supervision:
  - Enhance risk-based supervision in BNB; implementation undercut by scarce resources.
  - Needs: organization, staffing, processes, guidelines, legislative and regulatory amendments; implement Supervisory Review and Evaluation Process using AQR/Stress Test data; BNB should announce comprehensive early-intervention indicators.
- Financial safety net:
  - BDIF net asset position: -1.5 percent of GDP as of July 2016.
  - Current bank contributions: 0.3 percent of GDP each year; rebuilding BDIF to target funding level of 1 percent of covered deposits will take years.
  - Bank Resolution Fund began collecting fees in late 2015.
  - Authorities should consider speeding progress toward targeted coverage ratios and periodic reviews.

### Private pensions and insurance sector reviews
- Ongoing reviews of private pension funds and insurance companies; concerns: related party transactions, supervision quality, adequacy of resources.
- Reviews overseen by the Financial Supervisory Commission with newly appointed head expected to be completed by year-end.

### Authorities’ stance and next steps
- Authorities committed to addressing AQR and Stress Test issues and upgrading supervision capacity.
- Requested FSAP, expected in first half of 2017.
- Developing a reform plan for banking supervision and resolution but intend to wait for FSAP recommendations before finalizing.
- Broad agreement with staff on structural reforms, improving business environment and EU funds absorption, anti-corruption, and active labor market policies.
- Considering legislation to better monitor SOEs’ financial performance and fiscal risks; interested in IMF advice.

---

### Structural Reform Priorities, SOEs, and Investment Constraints

### Investment and growth constraints
- Potential growth fell from mid-2000s peak (around 5–7 percent) to around 1–2 percent recently.
- Overall investment share ~21 percent of GDP since 2011 (private investment subdued), below ~25 percent typical for catching-up economies.
- Key constraints: red-tape, inefficient public services, shortage of skilled labor, rule-of-law and corruption concerns.
- Emigration reduced working-age population and productivity; emigrants disproportionately working-age and better educated.

### SOEs and contingent liabilities
- Many SOEs in infrastructure sectors are bottlenecks to growth and productivity.
- Several SOEs (notably in energy and transport) are loss-making and accumulated significant debts; fiscal contingent liabilities about 14 percent of GDP in 2014.
- SOEs less profitable and less efficient than private peers; governance weaknesses and political interference common.

### Structural reform recommendations
- Improve conditions for investment:
  - Implement action plan to raise investment: improve infrastructure, remove regulatory bottlenecks, strengthen vocational education and skills, enhance administrative procedure consistency and efficiency.
- Ensure smooth transition to new EU programming period:
  - Timely implementation of laws on EU funds and public procurement; enhanced ex-ante control and e-procurement; municipal-level training to improve EU fund absorption.
- Fight corruption and overhaul judiciary:
  - Adopt a comprehensive anti-corruption law without weakening amendments; establish a single independent anti-corruption agency; step up successful investigations and prosecutions of high-level corruption.
  - Strengthen BNB due diligence for politically exposed persons, including source-of-wealth where appropriate.
- Address emigration effects via active labor market policies and institutional reforms:
  - Targeted policies can mitigate emigration effects; closing half of the labor participation gap with the EU frontier could fully offset harmful emigration effects on future growth.
  - Improve program awareness, employer–social authority cooperation, targeted training, recognition of foreign qualifications, deregulation of service-sector professions.
- Enhance SOE governance and performance:
  - Comprehensive SOE governance reform aligned with OECD best practices: define SOE scope and mandate, strengthen oversight and fiscal-risk monitoring in a dedicated unit, set performance targets, professionalize SOE boards.
  - Deregulation, opening to foreign investors, and enhanced competition—particularly in energy—recommended.

---

### Fiscal Policy, Medium-Term Plans, and Long-Term Sustainability

### Recent fiscal outturn and 2016 performance
- 2015 cash deficit: 2.9 percent of GDP (driven largely by administrative revenue measures and higher-than-expected growth); structural adjustment ~½ percent of GDP.
- 2014 cash deficit: 3.6 percent of GDP (original target 1.8 percent).
- Structural deficit: declined from 2.8 percent of GDP in 2014 to 2.2 percent in 2015.
- 2016 through August: significant overperformance due to excise increases, administrative measures, faster growth, and under-execution of EU-funded capital spending.
- 2016 projected tax revenue overperformance: expected to outperform the budget target by ¾ percent of GDP.
- Projected 2016 cash deficit (assuming overperformance saved and EU-funds spending accelerated): decline to 0.8 percent of GDP (below budget target of 2 percent).
- Note: headline deficit could be higher if a recently approved government loan is reclassified from below the line to above the line.

### Medium-term plans and recommendations
- Authorities’ medium-term plan: target cash fiscal balance by 2020.
- 2017 cash deficit projection: widen to 1.2 percent of GDP in 2017 due to delayed EU-funded capital spending; deficit should fall on an accrual basis.
- Legal target: Public Finance Act requires attainment/maintenance of zero or positive balance by 2020; general government deficit (ESA 2010) not to exceed 3 percent of GDP.
- Debt outlook: adherence to consolidation and structural balance thereafter will help reduce government debt gradually below 25 percent of GDP.
- Staff recommendation: save 2016 revenue overperformance to strengthen fiscal buffers against contingent liabilities in energy, financial, and other sectors.
- Medium-term measures:
  - Expenditure: reduce government personal expenses by 10 percent; limit goods and services spending; enhance efficiency per Development Strategy of the State Administration 2015–2020.
  - Revenue: raise excises and social security contribution rates in 2017–18; if expenditure savings fail, consider growth-friendly tax measures (e.g., raising property tax).
  - Example large spending: direct subsidies for farmers: 1.6 percent of GDP in 2016.

### Pensions, long-term pressures, and recommended reforms
- Pension system architecture:
  - Pillar 1: defined benefit PAYG with annual deficits around 5½ percent of GDP.
  - Pillar 2: mandatory defined contribution private pension scheme.
  - Pillar 3: voluntary defined contribution private pension scheme.
- 2015 parametric reforms to Pillar 1: implemented; would moderately reduce Pillar 1 annual deficits in next decade.
- Risks from Pillar 2 reforms: 2015 allowed unlimited shifts between Pillar 1 and Pillar 2 and reduced fees; large shifts back to Pillar 1 could undermine sustainability.
- Recommended actions:
  - Raise social security contribution rate to enhance sustainability while paying attention to competitiveness.
  - Increase statutory retirement ages: expected to reach 65 years for men by 2029 and for women by 2037; automatic link to life expectancy introduced once ages reach 65; modalities need fleshing out and should be accompanied by active labor market policies or wage subsidies to facilitate old-age employment.
  - Revamp Pillar 2 and 3 depending on asset-quality review results; ongoing review of private pension funds’ assets to identify weaknesses including related-company investments.

### Contingent liabilities and fiscal risks
- SOEs:
  - SOE contingent liabilities ~14 percent of GDP in 2014; NEK and BDZ cited as problematic.
  - Case: International Court of Arbitration ordered NEK to pay Atomstroyexport for equipment for cancelled Belene project; Parliament approved interest-free loan to help NEK clear obligation. If NEK’s repayment capacity insufficient and loan treated above the line, it could increase 2016 deficit by 1.4 percent of GDP.
  - Recommendation: MOF should have more prominent oversight role over SOEs.
- Subnational governments:
  - Municipalities: more than half of 265 municipalities have overdue loans; in some cases late payments >90 percent of budgets.
  - Recent amendment allows municipalities access to interest-free loans conditional on MOF-approved recovery plans.
- Shifts from Pillar 2 to Pillar 1:
  - Short-term: social security contribution increases could outpace pension payment increases.
  - Long-term: large shifts could be sizable and adverse for public finances.

### Staff appraisal (key points)
- Economy: resilient; output growing steadily; unemployment at lowest in seven years; current account in surplus.
- Fiscal: improvement in 2015 and revenue overperformance in 2016; government debt among lowest in Europe despite rise in 2014.
- Banking: AQR and stress test completion welcomed; banks must restore capital buffers promptly; new bona fide investors would improve credibility and governance; authorities should intervene if banks cannot meet capital requirements.
- Institutions: strengthen risk-based supervisory review; tighten legal framework on ultimate beneficial owners and related-party lending; announce comprehensive early-intervention indicators; FSAP to guide further reforms.
- Structural priorities: address aging and emigration with active labor market and return policies; reduce red-tape and corruption; improve SOE governance and competitiveness.
- Fiscal recommendations reiterated: save 2016 revenue overperformance; accelerate EU-funded capital spending execution; estimate and incorporate contingent liabilities into fiscal planning; implement long-term reforms to address projected rises in health- and pension-related spending and discourage excessive shifts from private to public pensions.

---

### Annex Summaries — Competitiveness, External Sector, and Debt Sustainability

### Annex I — Competitiveness and External Sector Assessment (selected findings)
- Staff overall: Bulgaria’s external position in 2015 broadly in line with fundamentals.
- Risk: continued labor cost increases exceeding productivity growth could impair competitiveness.
- Wages and labor costs:
  - Wages have outpaced productivity since 2012; manufacturing labor costs accelerated since 2014.
  - Bulgaria’s adjusted wage share reached EU levels in 2014.
- REER and export performance:
  - ULC-based REER strongly appreciated; consumption-based REER broadly stable and recently depreciated due to imported deflation.
  - EBA-lite REER gap: 3.0 (slight overvaluation).
  - Goods export volume grew 44 percent between 2010 and 2015.
- IIP and reserves:
  - IIP improved from -93.2 percent to -60.7 percent of GDP between 2010 and 2015.
  - Reserves/GDP rose from 36 to 45 percent from 2014 to 2015; reserves well above standard adequacy metrics.
- EBA-lite and staff adjustments (selected):
  - EBA-Lite REER Approach: REER gap 3.0.
  - Staff-adjusted cyclically-adjusted CA norm: -3.6 percent of GDP, implying CA gap 1.8 percent and REER gap -4.2 percent.

### Annex II — Debt Sustainability (selected)
- External debt:
  - Gross external debt peaked at 110 percent of GDP end-2009; fell to 77.2 percent of GDP end-2015 (92.1 to 77.2 percent from end-2014 to end-2015).
  - Excluding inter-company lending, external debt 49.4 percent by end-2015.
  - Projected external debt: increase to 81 percent of GDP in 2016 (Eurobond issuance) then decline to ~63 percent by 2021.
- General government debt:
  - Projected to increase in 2016 to 30 percent of GDP.
  - 2016 near-term rise: projected 3.8 percentage points of GDP over 2015 due to deflation and Eurobonds issuance (EUR 2 billion, 4.6 percent of GDP).
  - Assuming Fiscal Reserve Account (FRA) balances unchanged from projected 2017 level (BGN 6.2 billion, 6¾ percent of 2017 GDP), debt would decline to 23 percent of GDP by 2021.
  - Stress scenarios: debt likely to remain below 40 percent of GDP under most shocks; contingent liabilities (SOEs, banking) could make outcomes significantly worse.
- Long-term demographic impact:
  - Under baseline assumptions, debt declines to around 16½ percent of GDP by 2030 then rises and exceeds 60 percent of GDP by mid-2060s.
  - Under UN low-fertility scenario, debt exceeds 100 percent of GDP by 2085.
  - If a 100 percent shift from Pillar 2 to Pillar 1 in 2016 occurs, debt could rise to 60 percent of GDP by 2059 and reach 130 percent by 2100.

---

*Source: IMF staff compilation from Article IV report material (Content unit: _cr16344).*

### 1. Real Sector Developments, 2008–16 __________________________________________________________ 23

### 1. Real Sector Developments, 2008–16

### Context
- The Bulgarian economy has been resilient to shocks: the failure of a large domestically-owned bank in 2014 and spillovers from the Greek crisis in 2015 were largely contained; macroeconomic conditions have been steadily improving.
- Key macro outcomes:
  - Output gap is narrowing.
  - Unemployment continues to decline.
  - Current account is broadly in line with fundamentals.
  - Fiscal balance improved significantly in 2015 and outturn through August 2016 points to considerable overperformance in 2016.
  - Public debt increased noticeably in 2014 but remains among the lowest in Europe.
  - Non-financial corporate sector debt remains high, with a significant share consisting of inter-company debt.
- Main challenges identified:
  - Solidifying financial stability.
  - Raising potential growth (per capita income on a PPP basis remains less than half of the EU-28 average).
  - Addressing fiscal costs of aging and emigration.
- Drivers of lower potential growth since the global financial crisis:
  - Declining investment.
  - Diminishing productivity gains.
  - Adverse demographic trends (see Appendices I and II).
- Policy priorities highlighted:
  - Improve infrastructure and accelerate structural reforms (notably in the energy sector and state-owned enterprises).
  - Strengthen financial sector measures implemented after the 2014 bank failure.
  - Undertake reforms to protect long-term fiscal sustainability in face of rising health and pension spending pressures.
- Report focus areas:
  - Financial stability: discussion of the banking sector assessment (AQR and stress test) and reforms to strengthen the financial system.
  - Growth prospects: analysis of medium-term growth drivers, including emigration and SOEs in infrastructure sectors.
  - Long-term fiscal sustainability: assessment of recent fiscal developments and demographic-related spending pressures and options.

### Recent Economic Developments
- Real output and demand:
  - Real output grew by 3 percent in 2015, aided by stronger-than-expected demand from European markets.
  - GDP continued to grow at around 3 percent during the first half of 2016.
  - Private consumption overtook exports as the main driver of growth; EU-fund related public investment slumped.
- Inflation and prices:
  - Deflation largely driven by international commodity prices; energy and commodity prices have a larger weight in Bulgaria’s HICP basket than in the euro area.
  - Internal factors contributing to deflation included food and communication prices.
  - Most recent data point to gradual easing of deflation, supported by decelerating energy price declines and a pick-up in food prices.
- Labor market and wages:
  - Labor Force Survey-based unemployment rate declined to 8.2 percent in Q2 2016, reflecting growing employment opportunities and a shrinking labor force.
  - Nominal wages in the private sector rose by around 10 percent in 2015 and by about 8 percent year-on-year during the first half of 2016.
  - Monthly minimum wage increases cited:
    - Increase of 8.6 percent in 2015.
    - Increase of 13.6 percent in January 2016.
    - The minimum amounted to €189 on average in 2015, and was increased to €215 in January 2016.
  - Recent trends in the minimum wage and its ratio to the average wage have been in line with regional peers.
- External sector:
  - Current account registered a surplus of 1.4 percent of GDP in 2015 and stood at 2.8 percent of projected 2016 GDP during January–July 2016.
  - FDI has remained subdued.
  - External debt declined modestly to about 77 percent of GDP at end-July 2016, reflecting lower liabilities by both public and private debtors.
  - External sector assessment (Annex I) findings:
    - Bulgaria’s exports have remained competitive.
    - HICP-based real exchange rate has moved in line with peers in recent years.
    - ULC-based real exchange rate has appreciated faster than peers, reflecting in large part catching-up as Bulgaria’s wage level is still the lowest in the EU.
    - Competitiveness concerns could arise if wages continue to grow faster than productivity.
  - Reserves were 159 percent of the standard IMF metric in 2015 (slightly above the 100–150 percent range considered appropriate).

### Outlook and Risks
- Growth projections:
  - Real GDP growth is projected at 3 percent in 2016 and around 2½ percent in the medium term.
  - Near-term drivers: private consumption expected to remain the major contributor; public investment expected to contract in 2016 due to transition to the new EU programming period; private investment expected to recover over the near term.
  - Medium-term constraints: slow structural reform progress, limited productivity growth, modest investment due to business environment weaknesses, and a shrinking labor force from continued emigration and population aging.
  - Projected medium-term growth is considerably below CESEE averages and below what is needed for desirable income convergence.
- Risk assessment (summarized from the Risk Assessment Matrix as of September 28, 2016):
  - 1. Weak progress in structural reforms to raise productivity and mitigate emigration and aging (short/medium term).
    - Relative Likelihood: High/Medium
    - Impact if Realized: High — lower potential growth, higher unemployment, slow income convergence, increased fiscal pressures.
  - 2. Inadequate actions to address weaknesses identified by the AQR and stress test (short term).
    - Relative Likelihood: Medium/Low
    - Impact if Realized: High/Medium — reduced public confidence in identified banks; increased vulnerability to shocks.
  - 3. Protracted period of slower euro-area growth and deflation (short/medium-term).
    - Relative Likelihood: High/Medium
    - Impact if Realized: High — lower potential growth, higher unemployment, lower FDI, slower fiscal consolidation.
  - 4. Instability in Turkey.
    - Relative Likelihood: Medium
    - Impact if Realized: High — lower exports, employment, growth; higher social and fiscal pressure from refugee inflow.
  - 5. Protracted uncertainty associated with the timing and negotiating of Brexit arrangements (short/medium-term).
    - Relative Likelihood: Medium
    - Impact if Realized: Medium — spillovers via heightened uncertainty, reduced export demand, and investment.
  - 6. Significant slowdown in large EMs (short/medium-term).
    - Relative Likelihood: Medium
    - Impact if Realized: Medium — lower exports, employment, FDI, and growth; slower fiscal consolidation.
- Authorities’ views:
  - Authorities expected slightly lower near-term growth but higher medium-term growth than staff, citing stronger structural reforms and investment.
  - Authorities agreed risks were broadly balanced and highlighted downside risks from potential instability in Turkey given Bulgaria’s export exposure and geographic proximity.

### Policy Discussions — Financial Sector
- Post-2014 banking sector actions and reforms:
  - Authorities undertook Basel Core Principle (BCP) and International Association of Deposit Insurers (IADI) assessments and are implementing a detailed reform plan to follow-up on recommendations (Appendix III).
  - A law was passed to expand Bulgarian National Bank (BNB) powers for imposing supervisory measures, including dismissing senior management and replacing bank auditors.
  - Authorities concluded an Asset Quality Review (AQR) and stress test of the banking system (Appendix IV) to reduce uncertainty and enhance transparency.
  - Steps to strengthen crisis resolution and rebuild the banking safety net:
    - Transposition of the European Bank Recovery and Resolution Directive (BRRD) into Bulgarian law.
    - Replenishment of the Bulgarian Deposit Insurance Fund (BDIF), which had been depleted by the 2014 KTB failure.
    - In the first half of 2016, the BDIF secured two government-guaranteed loans from the WB and EBRD of €300 million each to shore up its financial capacity.
  - Authorities have requested a Financial Sector Assessment Program (FSAP), expected to be completed in the first half of 2017, to provide guidance for further reforms.
- Identified priorities and concerns:
  - Ensure effective implementation of BRRD transposition and associated resolution frameworks.
  - Follow up on AQR and stress test findings with adequate high-quality private capital and remedial measures to strengthen business models where needed.
  - Continue strengthening supervision, crisis management, and deposit insurance capacity to rebuild public confidence.

*Source: IMF staff compilation from Article IV report material (sections: Context; Recent Economic Developments; Outlook and Risks; Policy Discussions — Financial Sector).*

### 12. The authorities’ efforts to strengthen the banking system will support growth and

### 12. The authorities’ efforts to strengthen the banking system will support growth and help boost the provision of credit to businesses and households

### Banking system outlook and credit provision
- Private sector credit growth has remained tepid since the global financial crisis, reflecting weak credit demand despite high capital adequacy and high liquidity for most banks.
- Access to financing is ranked number one among the concerns for business in Bulgaria (WEF Global Competitiveness Report), particularly binding for innovation and for SMEs.
- Weaknesses in the legal and institutional framework for debt resolution and restructuring are important constraints to improving the lending and investment environment.
- Authorities are interested in setting up a system allowing continuous assessment and monitoring of developments in debt resolution processes, with a focus on insolvency.
- Asset prices have stayed broadly stable over the last year, as pressures from macro-financial factors abated benefiting from: improved growth outlook, the strengthened fiscal position, deleveraging external borrowing, a clearer picture about the banking system health, and improvements in the bank supervision framework.

### 2015 stress episode and authorities' crisis management
- The banking system came under stress in 2015 due to spillovers from Greece but the authorities successfully managed the episode and the system remained stable.
- About 3 percent of the system’s deposits were smoothly redistributed from Greek-affiliated banks to other banks.
- Crisis-management measures included:
  - daily reporting of liquidity and deposits;
  - higher liquidity requirements (30 percent) for Greek affiliate banks;
  - a requirement to reduce cross exposures between parent banks and affiliates;
  - prohibition of dividend distribution and repayment of subordinated debt.
- The successful sale of Alpha Bank’s branches in Bulgaria to Eurobank’s Bulgarian subsidiary in March 2016 further enhanced the BNB’s leverage in the event of an adverse shock.

### AQR and stress test findings (transparency and capital)
- The assessment showed most of the system remains well-capitalized after the AQR adjustments, particularly foreign-owned banks, which represent 76 percent of total system assets.
- In aggregate terms, the AQR adjustments amounted to 1.3 percent of risk-weighted assets, to be reflected in the banks’ end-2016 financial statements.
- Significant differences across banks were identified: First Investment Bank (FIB), the largest domestic bank (with about 10 percent of the banking system assets and a history of problems) and two small banks were found to have shortfalls against capital buffers required by the BNB.
- Additional buffers may be needed to cover Pillar II capital requirements that may arise from extrapolating the AQR findings and from assessment of banks’ risk profiles highlighted by the Stress Test.

### Bank recovery strategies and supervisory expectations
- Bank recovery strategies should restore credibility in identified banks.
  - One of the small banks has already raised capital.
  - The other two banks are pursuing private sector solutions to restore their capital buffers by mid-2017.
- Sourcing equity from new bona fide investors would help improve credibility and address governance concerns, especially for FIB (protracted connected-lending issues).
- The BNB needs to be confident that new capital does not rely on borrowed funds.
- It is important to comply with stipulated timelines and for the authorities to be ready to intervene if banks cannot restore capital buffers to required levels.
- At this stage, neither bank resolution nor public support is envisaged.

### Areas needing continued reform (identified areas)
- Asset quality
  - NPL ratio in Bulgaria rose after the global financial crisis and has remained broadly stable in recent years.
  - As of 2016Q1 it stood at 14½ percent (EBA definition), which is more than double the EU average.
  - The AQR has helped properly identify NPLs and ensure banks set aside appropriate provisions; however stronger efforts are needed to reduce NPLs, particularly for banks with lower capital ratios.
  - Recommended measures: require explicit operational targets for banks to engage borrowers in loan restructuring discussions; remove impediments to releasing collateral (judicial bottlenecks and lack of out-of-court workout mechanisms); promote effective write-offs within a reasonable time frame.
- Bank governance
  - Important deficiencies remain: need to strengthen regulatory requirements for transparency of groups’ operational and ownership structures (including stricter rules on definition and monitoring of banks’ ultimate beneficial owners and related parties), and to upgrade Boards’ governance and involvement in setting the risk appetite framework.
- Bank supervision
  - Need to enhance risk-based supervision in the BNB.
  - The recent BCP assessment report noted sound methodologies but implementation is undercut by scarcity of resources.
  - Bridging the gap requires organization, staffing, processes and guidelines improvements, plus further legislative and regulatory amendments.
  - Emphasis needed on implementing the Supervisory Review and Evaluation Process, building on information from the AQR and Stress Test; BNB should announce a comprehensive set of indicators for early intervention in banks.
- Financial safety net
  - The BDIF’s net asset position remains negative (-1.5 percent of GDP as of July 2016).
  - Given current bank contributions (0.3 percent of GDP each year), it will be years before it can fully repay its debt and reach the targeted funding level of 1 percent of the total amount of covered deposits with banks.
  - The recently-created Bank Resolution Fund started to collect fees from banks in late 2015.
  - Authorities should consider speeding up progress toward targeted coverage ratios and keep those ratios under periodic reviews against potential needs.

### Private pensions and insurance sector reviews
- Ongoing reviews of private pension funds and insurance companies will shed light on this relatively small but increasingly important sector.
- Persistent concerns include related party transactions, quality of supervision, and adequacy of supervisory resources.
- Reviews of pension funds’ assets and insurance companies’ balance sheets, overseen by the Financial Supervisory Commission with a newly appointed head, are expected to be completed by year-end.

### Authorities’ views on banking sector reforms
- Authorities stressed commitment to address AQR and Stress Test issues and to use assessment information to upgrade banking supervision capacity.
- Authorities are developing a new plan on reforms and development of banking supervision and resolution, intending to wait for FSAP recommendations before finalizing their reform plan.
- Authorities broadly agreed with staff recommendations on broader structural reforms (see below), reiterated commitment to improve the business environment and EU funds absorption, and noted ongoing anti-corruption and active labor market policy efforts.
- Authorities are considering legislation to better monitor SOEs’ financial performance and fiscal risks and expressed interest in Fund advice.

### Structural reforms: growth, investment, and constraints
- Bulgaria’s potential growth has fallen due to weaker investment, negative labor contributions, and near-stagnant productivity.
- Private investment has been subdued for the last five years despite a pick-up in public investment supported by EU funds.
  - The overall investment share has remained largely flat at around 21 percent of GDP since 2011, below the around 25 percent level typically considered necessary for a catching-up economy.
- Key constraints to private investment: red-tape, inefficiency in public service provision, and shortage of skilled labor.
- Persistent concerns regarding rule of law and corruption undermine confidence; corruption is an important business obstacle and is empirically associated with lower per-capita GDP.
- Emigration has led to a declining working age population and lower productivity; emigration of skilled labor has weighed on labor productivity and GDP growth via lower investment and consumption and higher wages and taxes.

### SOEs, contingent liabilities, and productivity
- Many SOEs in infrastructure sectors have become bottlenecks inhibiting higher growth and productivity.
- Several SOEs, notably in energy and transport, are loss-making and accumulated significant debts, accounting for fiscal contingent liabilities of about 14 percent of GDP in 2014.
- SOEs are generally less profitable and less efficient than private peers; ineffective governance, political interference, and poor output quality weigh on competitiveness and investment.

### Structural reform recommendations (summarized)
- Improve conditions for investment:
  - Implement action plan to raise investment: improve infrastructure, remove regulatory bottlenecks, strengthen vocational education and skills, enhance administrative procedure consistency and efficiency.
  - Swift implementation is key for tangible effects.
- Ensure smooth transition to new EU programming period:
  - Timely implementation of laws on EU funds and public procurement, enhanced ex-ante control and e-procurement procedures, and municipal-level training to improve EU fund absorption.
- Fight corruption and overhaul the judiciary:
  - Adopt a comprehensive anti-corruption law free of weakening amendments, establish a single independent agency with adequate powers to consolidate anti-corruption work, and step up successful investigations and prosecutions of high-level corruption.
  - BNB’s measures on due diligence for politically exposed persons are welcome and should be strengthened to establish source of wealth when appropriate.
- Address emigration effects via active labor market policies and institutional reforms:
  - Targeted labor market policies can mitigate emigration effects; closing half of the labor participation gap with the EU frontier could fully offset harmful emigration effects on future growth.
  - Improve program awareness, employer–social authority cooperation, and better-target training to reduce skill mismatch.
  - Promote reintegration through recognition of foreign qualifications and deregulation of service-sector professions.
- Enhance SOE governance and performance:
  - Undertake comprehensive SOE governance reform aligned with OECD best practices: define SOE scope and mandate, ensure effective oversight and fiscal-risk monitoring in a dedicated government unit, set clear performance targets and evaluation tools, professionalize SOE boards.
  - Deregulation, opening to foreign investors, and enhanced competition—particularly in energy—would improve productivity and reduce contingent liabilities.

### Fiscal policy (introductory note)
- Fiscal consolidation is proceeding faster than expected.

*International Monetary Fund — Staff report content (chapter 12).*

### 2.9 percent of GDP in 2015, driven largely by administrative revenue measures and higher-than-

### _cr16344 - 2.9 percent of GDP in 2015, driven largely by administrative revenue measures and higher-than-

### Fiscal outturn and 2016 performance
- 2015 cash deficit: 2.9 percent of GDP in 2015, driven largely by administrative revenue measures and higher-than-expected growth; represented an adjustment of about ½ percent of GDP in structural terms and partially reversed the slippage in 2014.
- 2014 cash deficit: 3.6 percent of GDP, compared to the original target of 1.8 percent of GDP.
- Structural deficit: declined from 2.8 percent of GDP in 2014 to 2.2 percent of GDP in 2015.
- 2016 through August: significant overperformance relative to the budget due to increases in excise rates, sustained administrative measures, faster-than-expected growth, and under-execution of EU-funded capital spending at the beginning of a new program period.
- 2016 projected tax revenue overperformance: expected to outperform the budget target by ¾ percent of GDP.
- Projected 2016 cash deficit (assuming overperformance is saved and EU-funds spending accelerated): decline to 0.8 percent of GDP, below the budget target of 2 percent of GDP.
- Note: The headline deficit, but not the structural deficit, could be higher if a recently approved government loan is reclassified from below the line to above the line; see para. 33 for further information.

### Medium-term plans and fiscal trajectory
- Authorities’ medium-term plans target cash fiscal balance by 2020.
- 2017 cash deficit projection: widen to 1.2 percent of GDP in 2017 as some delayed EU-funded capital spending is expected to be executed in 2017; the deficit should fall on an accrual basis.
- Legal target: The Public Finance Act requires attainment and/or maintenance of a zero or positive balance by 2020 and sets the general government deficit in ESA 2010 basis shall not exceed 3 percent of GDP.
- Debt outlook: Adhering to the consolidation plan and maintaining a structural balanced budget thereafter will help reduce government debt gradually to below 25 percent of GDP.
- Rationale: Keeping public debt low is especially important in the context of Bulgaria’s currency board arrangement.

### Revenue saving recommendation and rationale
- Recommendation: The recent revenue overperformance should be saved.
- Justifications:
  - Need to strengthen fiscal buffers to address unanticipated needs from contingent liabilities in the energy, financial, and other sectors.
  - Cyclical perspective: recent consumption growth has been above trend, supporting saving temporary gains.
- Authorities’ stated plan: intend to save the revenue overperformance in 2016 and pursue fiscal consolidation to attain fiscal balance by 2020.
- Authorities’ view on 2016 outcome: possibility of ending 2016 with a deficit under 0.8 percent of GDP given difficulties in accelerating EU-funds absorption.

### Medium-term consolidation measures (expenditure and revenue)
- Expenditure-side:
  - Plan to reduce government personal expenses by 10 percent and limit spending on goods and services.
  - Importance of supporting cuts with measures to enhance efficiency in public service provision as laid out in the Development Strategy of the State Administration 2015–2020.
- Revenue-side:
  - Plan to raise excises and social security contribution rates in 2017–18.
  - If envisaged expenditure savings do not materialize, consider additional growth-friendly tax measures, for instance raising the property tax.
- Example of large spending items: direct subsidies for farmers are sizable at 1.6 percent of GDP in 2016.

### Long-term fiscal pressures and pension system
- Current pension architecture:
  - Pillar 1: defined benefit pay-as-you-go scheme with annual deficits of around 5½ percent of GDP.
  - Pillar 2: mandatory defined contribution private pension scheme.
  - Pillar 3: voluntary defined contribution private pension scheme.
- Demographic challenge: shrinking and aging population will increase pension and health-related spending over the long term; age-related spending sensitive to demographic projections.
- 2015 parametric reforms to Pillar 1: implemented and would help reduce Pillar 1 annual deficits moderately in the next decade.
- Risks from Pillar 2:
  - 2015 reforms introduced an option to allow unlimited shifts of balances between Pillar 1 and 2 and reduced Pillar 2 fees.
  - Sustainability would be undermined if concerns about private pension funds’ viability lead to large shifts to Pillar 1.
- Recommended further pension actions:
  - Raise the social security contribution rate: Bulgaria’s public pension system has relatively low contribution collections and income replacement rates; raising contributions could enhance sustainability while preventing an increase in old-age poverty, with attention to competitiveness.
  - Increase the statutory retirement ages: statutory ages expected to reach 65 years for men by 2029 and for women by 2037; an automatic link between statutory retirement ages and life expectancy was introduced once ages reach 65 years; modalities of adjustment need to be fleshed out and accompanied by active labor market policies or wage subsidies to facilitate old-age employment.
  - Revamp Pillar 2 and 3 depending on asset quality review results: ongoing review of private pension funds’ assets expected to identify weaknesses including investment in related companies.

### Structural reforms to support fiscal sustainability and growth
- Efficiency gaps: spending efficiency on education, health, and public investment lags peers, indicating scope for efficiency gains.
- Health:
  - Address low use of preventive measures and outpatient services and overuse of inpatient care.
  - Recent measures target oversupply of low-use hospitals and contain pharmaceutical pricing.
  - Demand for long-term care (LTC) will increase with aging; legislative amendment needed to enhance synergy between social services and health care systems.
- Education:
  - Modernize vocational education and encourage adult participation in lifelong learning.
  - Integrate vulnerable groups as per the Strategy for Educational Integration of Children from Ethnic Minorities, 2015–2020.
- Public investment:
  - Improve appraisal, selection, and approval of investment projects; enhance economic and social evaluation capacity beyond engineering analysis.
  - Strengthen procurement practices: greater transparency, faster procurement, and more competition to improve public investment outcomes.
  - Context: 2011 CVM report found a general irregularity rate of 60 percent among verified tenders related to EU funds and irregularity in almost 100 percent of large public infrastructure projects; 2016 CVM report noted a relatively high number of ongoing OLAF investigations with Bulgaria related to EU funds.

### Contingent liabilities and fiscal risks
- SOEs:
  - Weak performance of several SOEs, including NEK and the Bulgarian State Railways (BDZ), raises contingent liability concerns.
  - Case: International Court of Arbitration ordered NEK to pay Russia’s Atomstroyexport for equipment produced for the cancelled Belene nuclear power plant project; Parliament approved an interest-free loan to help NEK clear this obligation. Based on available information this loan is treated below the line; if NEK’s repayment capacity is insufficient, it would be treated above the line as an expense and could increase the 2016 deficit by 1.4 percent of GDP.
  - Recommendation: MOF should be given a more prominent oversight role over SOEs.
- Subnational governments:
  - Municipalities have autonomous powers including debt financing within limits; many municipalities face financial problems.
  - Recent amendment to the Public Finance Act gives municipalities access to interest-free loans conditional on MOF-approved financial recovery plans.
  - MOF reports: more than a half of Bulgaria’s 265 municipalities now have overdue loans; in some cases late payments account for over 90 percent of their budgets. Problems often linked to advance funding of EU regional development projects and delayed reimbursement.
- Large shifts from Pillar 2 to Pillar 1:
  - Short-term budgetary effect: increases in social security contribution would outpace increases in pension payments.
  - Long-term budgetary implication: could be sizable and adverse.

### Authorities’ views
- Plan to save 2016 revenue overperformance and continue fiscal consolidation to attain fiscal balance by 2020.
- Emphasized efforts to reduce smuggling, improve tax compliance, and combat the shadow economy under a single national strategy for 2015–17.
- Agreed additional parametric reforms will be needed in the long term for pension sustainability.
- Noted that administrative measures would be sustained.
- Concern: risks related to shifts from Pillar 2 to Pillar 1 stem from public concerns about private pension funds’ viability; government may be compelled to help pensioners if such risks materialize given prior mandatory participation in Pillar 2 until the 2015 reforms.

### Staff appraisal — key points
- Economy: shown resilience to shocks; output growing steadily, unemployment at its lowest in seven years, external current account in surplus.
- Fiscal: improvement in 2015 and considerable revenue overperformance in 2016; government debt remains among the lowest in Europe despite a noticeable increase in 2014.
- Banking sector: completion of the AQR and stress test welcomed; banks must restore capital buffers promptly; participation of new bona fide investors would improve credibility and governance; authorities should intervene promptly if banks cannot meet capital requirements.
- Supervision and institutions: recent reforms to strengthen financial system oversight are welcome; central bank should pursue a more risk-based supervisory review and evaluation using AQR/stress-test information; tighten legal framework on ultimate beneficial owners and related party lending; announce comprehensive indicators for early intervention; upcoming FSAP will guide further reforms.
- Structural priorities: address aging and emigration via active labor market policies and return conditions for emigrants; reduce red-tape and corruption to improve business environment and private investment; improve SOE competitiveness and governance to reduce contingent liabilities and enhance productivity.
- Fiscal recommendations reiterated: save 2016 revenue overperformance, accelerate execution of EU-funded capital spending, estimate and incorporate contingent liabilities into fiscal planning, and implement long-term reforms to address projected rises in health- and pension-related spending and to discourage excessive shifts from private to public pensions if concerns about private funds arise.

*International Monetary Fund — Bulgaria staff report excerpt*

### 40. It is proposed that the next Article IV consultation with Bulgaria take place on the

### _cr16344 - 40. It is proposed that the next Article IV consultation with Bulgaria take place on the

### Real sector developments (summary of Figure 1 and Table 1–3)
- Industrial production and investor confidence have been on an upward trend, albeit weaker than in peers.
- Wholesale and retail trade growth has eased recently.
- Growth has been steady in recent quarters, supported by external and domestic demand.
- Private consumption is on the rise while investment and public consumption have been affected by the EU funds gap.
- Deflation started to ease recently.
- Key exact indicators (selected):
  - Real GDP: 3.0 (2015), 3.0 (2016), 2.8 (2017), 2.5 (2018), 2.5 (2019), 2.5 (2020), 2.5 (2021).
  - Real domestic demand: 1.0 (2015), 2.8 (2016), 3.1 (2017), 2.7 (2018), 2.7 (2019).
  - Private consumption: 0.8 (2015), 3.8 (2016), 3.3 (2017), 3.0 (2018).
  - Gross capital formation: 2.3 (2015), 0.1 (2016), 2.7 (2017), 2.5 (2018).
  - Output gap (percent of potential GDP): -1.5 (2015), -0.7 (2016), -0.2 (2017), -0.1 (2018), 0.0 (2019–2021).
  - Unemployment rate (percent of labor force): 9.2 (2015), 8.2 (2016), 7.1 (2017), 6.9 (2018), 6.7 (2019), 6.6 (2020), 6.5 (2021).
  - HICP inflation (end of period): -0.9 (2015), -0.8 (2016), 1.4 (2017), 1.8 (2018), 2.0 (2019), 2.1 (2020–2021).
  - GDP deflator: 0.3 (2015), -0.7 (2016), 0.6 (2017), 1.6 (2018), 1.9 (2019), 2.1 (2020–2021).

### External sector developments (summary of Figure 2, Table 4–5)
- The current account remained in surplus as import growth lagged export growth and the terms of trade improved.
- Capital inflows have moderated recently.
- External debt declined and international reserves continued to strengthen.
- Key exact indicators (selected):
  - Current account balance (percent of GDP): 1.4 (2015), 0.8 (2016), 0.0 (2017), -0.3 (2018), -0.5 (2019), -0.9 (2020), -1.7 (2021).
  - Merchandise trade balance (percent of GDP): -4.3 (2015), -4.7 (2016), -5.3 (2017–2019), -5.4 (2020–2021).
  - Exports (percent of GDP): 50.2 (2015), 47.0 (2016), 48.5 (2017), 48.7 (2018), 48.6 (2019).
  - Imports (percent of GDP): 54.6 (2015), 51.8 (2016), 53.7 (2017), 54.0 (2018), 53.9 (2019).
  - Capital inflows: FDI (percent of GDP) -3.4 (2015), -3.0 (2016), -2.9 (2017), -3.0 (2018), -3.2 (2019), -3.4 (2020), -3.6 (2021).
  - Gross international reserves (billions of euros, memorandum): 20.3 (2015), 21.7 (2016), 22.5 (2017), 23.7 (2018), 24.7 (2019), 25.7 (2020), 26.2 (2021).
  - External debt (gross external debt, percent of GDP, memorandum): 78.1 (2014), 80.5 (2015), 75.4 (2016), 72.4 (2017), 69.5 (2018), 66.2 (2019), 62.6 (2020), 62.6 (2021).
  - International investment position (millions of euros): -26,869 (2015), -25,397 (2016), -24,339 (2017), -23,435 (2018), -22,642 (2019).

### Fiscal developments (summary of Figure 3, Table 6a–6b, Table 7)
- Fiscal adjustment to correct a large slippage in 2014 and achieve the medium-term objective is proceeding.
- Adjustment has been driven by strong revenue performance on the back of increases in excise rates, administrative efforts, and buoyant economic activity, and by deceleration of spending growth in 2016 onwards.
- Despite deficit reduction, government debt is projected to rise in 2016 due to Eurobonds issuances in March, although Bulgaria’s debt remains among the lowest in the EU.
- The Fiscal Reserve is rising as the fund raised by the recent Eurobonds is largely saved to create buffers.
- Key exact indicators (selected):
  - General government net lending/borrowing (cash basis, percent of GDP): -2.9 (2015), -0.8 (2016), -1.2 (2017), -0.7 (2018), -0.3 (2019), 0.0 (2020–2021).
  - General government primary balance (percent of GDP): -2.1 (2015), 0.0 (2016), -0.2 (2017), 0.2 (2018), 0.6 (2019), 0.9 (2020–2021).
  - Structural overall balance (percent of GDP): -2.3 (2015), -0.5 (2016), -1.1 (2017), -0.7 (2018).
  - Revenue (percent of GDP): 35.8 (2015), 36.0 (2016), 36.8 (2017), 36.5 (2018), 36.9 (2019), 37.0 (2020–2021).
  - Expenditure (percent of GDP): 38.7 (2015), 36.7 (2016), 37.9 (2017), 37.2 (2018), 37.0 (2019), 37.0 (2020–2021).
  - General government gross debt (percent of GDP): 26.3 (2015), 29.7 (2016), 26.3 (2017), 25.9 (2018), 25.1 (2019), 24.0 (2020), 23.0 (2021).
  - Memorandum: Gross public debt (percent of GDP) 26.4 (2014), 26.3 (2015), 29.7 (2016).

### Monetary and financial sector developments (summary of Figure 4, Table 8–9)
- Despite recent turmoil, deposits in the banking system have continued growing, with no increase in deposit rates which have continued to decline.
- Capital adequacy ratios are reportedly comfortable compared to peers.
- Nonperforming loans (NPLs) remained high across lending segments, contributing to anemic credit growth, even after controlling for the KTB effect.
- Key exact indicators (selected):
  - Broad money (annual percent change): 8.8 (2015), 3.6 (2016), 4.5 (2017), 5.6 (2018), 5.9 (2019), 6.2 (2020–2021).
  - Domestic private credit (annual percent change): -1.6 (2015), 2.9 (2016), 6.0 (2017), 7.1 (2018), 7.2 (2019), 7.4 (2020–2021).
  - Deposit (percent of GDP): Total 62.6 (Dec 2015), 64.0 (Dec 2016), projected 85.6 (Dec 2021) in levels (Table 8).
  - Capital adequacy: Capital to risk-weighted assets 21.9 (2014), 22.2 (2015), 22.9 (March 2016); Tier 1 capital to risk-weighted assets 20.0 (2014), 20.5 (2015), 21.4 (March 2016).
  - Nonperforming loans to total gross loans: 16.7 (2014), 20.6 (2015), 20.2 (March 2016).
  - Return on assets: 0.9 (2014), 1.0 (2015), 1.4 (March 2016).
  - Liquid assets to total assets: 26.1 (2014), 31.6 (2015), 31.7 (March 2016).
  - Monetary Survey (billions of leva): Net foreign assets 40.7 (Dec 2015), 43.3 (Dec 2016); Broad money (M3) 74.0 (Dec 2015), 76.6 (Dec 2016).

### Key balance of payments and external positions (Table 4–5, selected)
- Current account (millions of euros): 609 (2015), 358 (2016), 16 (2017), -168 (2018), -260 (2019), -471 (2020), -953 (2021).
- Trade balance (millions of euros): -1,917 (2015), -2,142 (2016), -2,461 (2017), -2,560 (2018), -2,669 (2019).
- Gross international reserves (millions of euros): 20,285 (2015), 21,677 (2016), 22,524 (2017), 23,670 (2018), 24,719 (2019), 25,673 (2020), 26,209 (2021).
- International investment position (millions of euros): -26,869 (2015), -25,397 (2016), -24,339 (2017), -23,435 (2018), -22,642 (2019).
- Financial liabilities (millions of euros): 64,725 (2015), 64,525 (2016), 64,916 (2017), 65,882 (2018), 66,993 (2019).

### Projections and outlook (from projection tables)
- Growth is projected to moderate gradually: Real GDP projections are 2.8 (2017), 2.5 (2018–2021).
- Inflation is projected to return to positive territory: HICP average 0.6 (2017), 1.6 (2018), 1.9 (2019), 2.1 (2020–2021).
- Fiscal balances are projected to improve modestly toward balance: general government net lending/borrowing projected 0.0 (2020–2021); structural balances projected 0.0 (2020–2021).
- External positions: current account projected to turn negative in the medium term: 0.0 (2017), -0.3 (2018), -0.5 (2019), -0.9 (2020), -1.7 (2021).

*Source: IMF staff report content as provided in the supplied PDF content.*

### Annex I. Competitiveness and External Sector Assessment

### Annex I. Competitiveness and External Sector Assessment

### Overall assessment
- Staff’s overall assessment: Bulgaria’s external position in 2015 was broadly in line with fundamentals.
- Risk highlighted: Continued labor cost increase in excess of productivity growth could pose risks to competitiveness going forward.
- Policy note: Achieving a balanced fiscal position in line with the authorities’ consolidation plan will help to sustain external sustainability.

### Competitiveness developments
- Wages and labor cost trends
  - Wages and labor cost have been on an increasing trend, outpacing productivity growth.
  - Manufacturing labor costs picked up again in 2011 and have been on an accelerated growth trend since 2014.
  - Bulgaria’s adjusted wage share development decoupled from regional peers in 2011 and has reached EU levels in 2014.
  - Since 2012, wage growth in Bulgaria has surpassed labor productivity growth.
- Real effective exchange rates (REER)
  - Driven by rising labor costs, Bulgaria’s REER based on ULC has strongly appreciated well beyond the financial crisis.
  - The consumption-based REER was broadly stable during the post-crisis low-inflation environment and has depreciated recently due to imported deflation, largely from falling international energy prices.
  - EBA-lite REER model result: gap between actual and REER norm estimated at 3 percent (pointing to slight overvaluation but within the range considered in line with fundamentals).
  - Note: The EBA-lite REER is based on consumer prices; divergence between consumption-based and ULC-based REER developments raises question of potential overvaluation risks.
- Drivers of wage growth
  - Bulgaria’s wage level remains the lowest among EU countries but has been increasing with accelerated speed since EU accession in 2007.
  - Contributing factors: catching-up dynamics, cyclical factors, unfavorable demographics, continuous emigration of high-skilled workers.
  - Labor shortage increasingly reported as a binding factor limiting business activity in the industry sector.
- Export performance
  - Goods export volume grew by 44 percent between 2010 and 2015, exceeding export growth in peer countries among the EU’s other new member states.
  - World market share of Bulgarian exports has been increasing steadily and, despite some slowdown since 2013, has outperformed peer countries.
  - Likely supports: higher productivity gains in tradable industries than in non-tradable service sectors, and improvements in non-cost competitiveness.
- Summary risk assessment
  - Overall risks to competitiveness are limited but might be rising.
  - So far, increasing wages have not seriously impaired export performance because labor costs are still at comparable low levels.
  - Competitiveness concerns could arise should the divergence between wage growth and productivity growth continue.

### International investment position
- IIP trend
  - Between 2010 and 2015, the IIP increased from -93.2 percent to -60.7 percent of GDP.
  - Improvement driven mainly by an increase in reserve assets and a reduction in other liabilities (reflecting private-sector deleveraging).
- EBA-lite External Sustainability approach (2015)
  - Stabilizing the IIP at the 2015 level would imply:
    - CA norm of -4.5 of GDP
    - REER gap of -6.7 percent
  - Staff view: Given expected continued private-sector deleveraging, further improvement in the IIP would be appropriate, implying a higher CA norm and a lower REER gap.
- EBA-lite adaptations and staff adjustments (selected figures)
  - EBA-Lite REER Approach: REER gap 3.0
  - EBA-Lite CA Approach (standard version): Actual CA 1.4; Cyclically-adjusted CA 1.1; CA norm -5.5; CA gap 6.8; REER gap -15.6
  - EBA-Lite CA Approach (adjusted version): Actual CA 1.4; Cyclically-adjusted CA (removing all temporary factors) -1.7; CA norm -5.5; Cyclically-adjusted CA norm -5.7; CA gap 6.8; REER gap -4.2
  - Staff adjustment: Revised cyclically-adjusted CA norm amounts to -3.6 percent of GDP (adjusted upward by about 2 percentage points), implying a CA gap of 1.8 percent and a REER gap of -4.2 percent.
  - Rationale: EBA-lite features a large constant term reflecting unexplained need for external financing across a large emerging market sample; staff considered adjustment appropriate given Bulgaria’s context.
  - Uncertainty: Bulgaria’s CA standard error is 9 percent compared to EBA sample standard error of 5 percent.

### Capital flows
- Direct and portfolio investment
  - Net FDI inflows have been fairly stable around 2.5 percent of GDP over time and increased slightly to 3.4 percent of GDP in 2015.
  - Portfolio debt inflows resumed in 2014, reflecting renewed investor confidence.
- Private sector deleveraging and reserves
  - Private-sector deleveraging ongoing; other investment positions abroad reduced.
  - Reserve accumulation picked up due to current and capital account surpluses, FDI and portfolio inflows.

### Current account developments
- Historical adjustment
  - After a deficit of -23.7 percent in 2007, the current account adjusted rapidly in light of the abrupt reduction in capital inflows.
  - Adjustment mainly driven by compressed imports due to weaker domestic demand and reduced investment-related imports while exports remained resilient.
- Recent balances
  - Since 2010, the current account has been broadly balanced, recording a small surplus of 1.4 percent in 2015.
- Staff-assessed external position
  - CA model of EBA-lite estimates a cyclically-adjusted CA norm of -5.7 percent of GDP.
  - Staff estimates a cyclically-adjusted CA, removing temporary factors primarily related to imports, of around -1.7 percent of GDP.
  - After staff adjustment (see International investment position), revised cyclically-adjusted CA norm is -3.6 percent of GDP; CA gap 1.8 percent; REER gap -4.2 percent.
  - Conclusion: Bulgaria’s external position is considered broadly consistent with fundamentals and desirable policy settings.

### International reserves
- Reserve levels and adequacy (2014–2015)
  - Ratio of reserves over GDP increased from 36 to 45 percent from 2014 to 2015.
  - Reserves remained well above standard rules of thumb: three months’ coverage of prospective imports and 20 percent of broad money.
  - In 2015, reserves exceeded 100 percent of short-term debt and exceeded the IMF’s metric for assessment of reserve adequacy (ARA) in emerging markets by a large margin.
  - Currency board metrics:
    - Ratio of reserves over the monetary base was 141 percent in 2015.
    - Broad money coverage ratio increased to 53 percent.

---

### Annex II. Debt Sustainability

### External debt
- Historical and recent levels
  - Gross external debt peaked at 110 percent of GDP at end-2009 and declined thereafter.
  - From end-2014 to end-2015, gross external debt fell from 92.1 to 77.2 percent of GDP, driven by banks and a substantial decline in inter-company lending.
  - Excluding inter-company lending, external debt declined to 49.4 percent by end-2015, remaining largely covered by international reserves.
- Rollover risks
  - Rollover risks related to external exposure in the non-bank private sector are contained given moderate short-term exposure; these risks did not materialize during the global financial crisis.
- Projections
  - After increasing to a projected 81 percent of GDP in 2016 on the back of a Eurobond issuance, external debt is set to decline further to around 63 percent of GDP by 2021.
  - Medium-term decline largely driven by nominal GDP growth; nominal external debt expected to remain broadly stable.
  - Private-sector deleveraging projected to continue; external public sector lending will slightly increase, broadly offsetting each other.
  - Historical scenario (10-year averages) produces a very similar trajectory.
- Resilience to shocks
  - External debt dynamics appear broadly resilient to shocks to interest rate, growth rate, and the current account deficit.
  - Under the current account shock scenario, external debt is projected to reach 85 percent over the medium-term; under other scenarios the downward trend resumes.

### General government debt
- Levels and drivers
  - General government gross debt projected to increase in 2016 to 30 percent of GDP.
  - Public debt rose sharply between 2010 and 2015 driven by the loan to the Bulgarian Deposit Insurance Fund, liquidity support to the banking sector, deterioration of the primary balance, and interest-growth dynamics.
- 2016 factors
  - Near-term increase in 2016: projected rise of 3.8 percentage points of GDP over 2015 due to deflation and the recent sizable Eurobonds issuance (EUR 2 billion, 4.6 percent of GDP).
  - Part of Eurobonds-related inflows expected to be used for creating buffers ahead of the AQR, resulting in an increase in Fiscal Reserve Account (FRA) by 2.5 percent of GDP in 2016.
  - Note in source: [In light of the uneventful outcomes of the AQR and stress test, the authorities plan not to issue new Eurobonds in 2017 and limit new external borrowing to refinancing the amortizations due in 2018 thereafter.]
- Medium-term outlook
  - Assuming FRA balances remain unchanged from projected 2017 level (BGN 6.2 billion, 6¾ percent of the 2017 GDP) for 2017–2021, general government debt would decline to 23 percent of GDP by 2021.
  - If the government were to drawdown FRA for financing, the pace of debt reduction could be faster.
- Risk scenarios and contingent liabilities
  - Alternative scenarios indicate general government debt would likely remain below 40 percent of GDP under most shocks.
  - Fan chart analysis: under a scenario where the primary balance is not expected to over perform and growth shocks are more likely to be negative than positive, debt may exceed 40 percent of GDP by 2021 with a 15 percent chance, or by 2019 with a 10 percent chance.
  - Gross financing needs expected to remain well below 10 percent of GDP under various shock scenarios.
  - Outcomes could be significantly higher if contingent liabilities—especially related to SOEs and the banking sector—materialize, underscoring the importance of sound fiscal risk assessment and management.

*Source: Annex I. Competitiveness and External Sector Assessment; Annex II. Debt Sustainability (_cr16344).*

### 6. In the longer term, spending pressures from the aging population can create

### _cr16344 - 6. In the longer term, spending pressures from the aging population can create

### Long-term fiscal impact of aging and baseline assumptions
- Assumptions:
  - (i) the overall balance evolves from the balanced position in 2021 by the projected increases in age-related spending net of the projected increases in social security contribution revenue through 2100;
  - (ii) the baseline scenario on GDP growth where demography changes in line with the UN’s medium-fertility rate scenario.
- Under these assumptions, public debt trajectory:
  - Debt would first decline to around 16½ percent of GDP by 2030.
  - Debt will then start increasing and exceed 60 percent of GDP by the mid-2060s.
- Sensitivity to demography:
  - Assuming the UN’s low-fertility rate scenario, debt would start rising rapidly from the 2040s and exceed 100 percent of GDP by 2085.
- Sensitivity to pension reform (Pillar shift):
  - If a 100 percent shift from Pillar 2 to Pillar 1 takes place in 2016, government debt could rise to 60 percent of GDP by 2059 assuming baseline GDP growth projections, and would reach 130 percent of GDP by 2100.

### Fiscal context and relevant stock figures
- Minimum balance of FRA is determined in the annual budget law; for 2016, the minimum balance is set at BGN 4.5 billion.
- The total SOE liabilities stood at 13.4 percent of GDP at end-2014.
- The average fiscal cost of 91 financial crises across advanced and emerging markets economy was about 10 percent of GDP (IMF, 2016).

### Debt Sustainability Analysis (DSA) — baseline and stress tests (summary of projections and shocks)
- Baseline DSA indicators and historical/projection snapshots:
  - Nominal gross public debt: various yearly values shown in table (examples include 17.9, 26.4, 26.3, 29.7, 26.3, 25.9, 25.2, 24.1, 23.0).
  - Public gross financing needs (examples): 2.6, 8.2, 11.2, 2.3, 4.9, 2.4, 1.6, 2.6, 3.4.
  - Real GDP growth projections (examples): 2.9, 1.5, 3.0, 3.0, 2.8, 2.5, 2.5, 2.5, 2.5.
  - Inflation (GDP deflator) examples: 5.0, 0.4, 0.3, -0.7, 0.6, 1.6, 1.9, 2.1, 2.1.
  - Effective interest rate (defined as interest payments divided by debt stock) examples: 4.9, 4.1, 3.2, 3.1, 3.3, 3.5, 3.6, 3.7, 3.9.
- Contributions to change in gross public sector debt (cumulative examples):
  - Change in gross public sector debt: -2.3, 9.2, -0.1, 3.4, -3.4, -0.3, -0.8, -1.1, -1.1, -3.3.
  - Identified debt-creating flows: -2.3, 9.8, -1.4, 3.8, -3.0, 0.1, -0.4, -0.7, -0.7, -0.9.
  - Primary deficit row examples: -0.7, 3.4, 2.5, 0.4, 0.7, 0.2, -0.2, -0.5, -0.5, 0.1.
  - Automatic debt dynamics examples: -0.9, 0.4, 0.0, 0.2, 0.0, -0.2, -0.2, -0.2, -0.2, -0.6.
  - Other identified debt-creating flows examples: -0.7, 6.0, -3.8, 3.2, -3.6, 0.0, 0.0, 0.0, 0.0, -0.4.
  - Residual (including asset changes) examples: 0.0, -0.6, 1.2, -0.5, -0.4, -0.4, -0.4, -0.4, -0.4, -2.4.
- DSA scenario assumptions (examples reproduced exactly):
  - Baseline scenario real GDP growth (2016–2021): 3.0, 2.8, 2.5, 2.5, 2.5, 2.5.
  - Historical scenario real GDP growth (2016–2021): 3.0, 2.4, 2.4, 2.4, 2.4, 2.4.
  - Baseline inflation (2016–2021): -0.7, 0.6, 1.6, 1.9, 2.1, 2.1.
  - Baseline primary balance (2016–2021): -0.4, -0.7, -0.2, 0.2, 0.5, 0.5.
  - Constant Primary Balance scenario primary balance (2016–2021): -0.4, -0.4, -0.4, -0.4, -0.4, -0.4.
  - Effective interest rate examples repeated in scenarios: 3.1, 3.3, 3.5, 3.6, 3.7, 3.9.
- Stress test scenarios described (exact formulation preserved):
  - Real GDP growth shock: (i) real GDP growth for 2017-18 below baseline by a 10-year historical standard deviation; (ii) primary balance deteriorates; (iii) additional borrowing leads to increases in interest rate of 25 bbp per 1 percent of GDP worsening of the primary balance; (iv) inflation declines by 0.25 percentage point per 1 percentage point decrease in GDP growth.
  - Primary balance shock: (i) primary balance for 2017-18 below baseline by 50 percent of the 10-year historical standard deviation; (ii) additional borrowing leads to increase in interest rate of 25 bbp per 1 percent of GDP worsening of the primary balance.
  - Real interest rate shock: 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.
  - Combined macro-fiscal shocks and a 30 percent real depreciation shock are also modeled.

### Drivers of potential growth (Appendix I)
- Trend: Potential growth in Bulgaria declined from around 5–7 percent during the mid-2000s peak to around 1–2 percent in recent years.
- Main contributions:
  - Capital accumulation was the major consistent driving force of potential growth; capital and TFP contributed almost equally in the early 2000s, with capital share increasing until the financial crisis.
  - FDI inflows surged to 27 percent of GDP during the boom years and the current account deficit reached 24 percent in the same year; since the beginning of the decade, FDI has plateaued at around 3 percent of GDP.
  - Labor contributions turned negative from 2007 due to demographic trends and falling labor participation; rising NAWRU also pressured labor contributions.
  - TFP growth stalled after the crisis due to global and country-specific factors, including unfavorable economic structures, weak institutions (notably lack of judicial independence and impartiality of courts), ineffective healthcare systems (reflected by relatively low life expectancy), and restrictive business and FDI regulations.

### Emigration and its macroeconomic effects (Appendix II)
- Historical emigration:
  - Bulgaria lost around 12 percent of its population between 1990 and 2012.
  - Migrants were disproportionately working-age and significantly better educated than the Bulgarian average (higher share of tertiary education among migrants).
- Drivers:
  - Push factors: relatively low per-capita income, high unemployment, high inequality, high level of corruption, poor institutional environment, cyclical conditions and country-specific shocks (e.g., mass lay-offs, hyperinflation crisis).
  - Pull factors: EU accession in 2007 enabling free movement, better work prospects, more generous social benefits in Western EU countries, and expanding expatriate communities.
- Quantified impacts on productivity and output:
  - Without emigration, cumulated real labor productivity growth between 1995 and 2012 could have been around 6 percent stronger.
  - The estimated cumulative loss of real GDP growth during 1995–2012 amounts to around 8 percent—mainly due to skilled emigration.
  - Based on multi-region model simulations using UN projections for 2015–30, the cumulative output loss could amount to around 5 percent going forward.
- Channels of impact modeled: lower investment and consumption, lost competitiveness through higher wages, and higher taxes on labor in response to social spending pressures.

*Source: _cr16344 - 6. In the longer term, spending pressures from the aging population can create*

### Appendix III. Improving Bank Supervision

### Appendix III. Improving Bank Supervision

### Action Plan and Objectives
- A Plan on Reforms and Development of Banking Supervision was published by BNB in October 2015 to address BCP and National Audit Office recommendations.
- The Plan focuses on three broad areas:
  - (i) governance and organization of banking supervision,
  - (ii) regulatory framework and supervisory processes,
  - (iii) crisis management and preparedness.
- The Action Plan is subject to regular follow-up to support transparency and accountability in banking supervision.

### Governance and Organizational Reforms
- Governance of banking supervision at the BNB has been revised to provide more internal checks and balances and better support for decision-making.
- Main changes implemented so far:
  - Increased accountability of the Deputy Governor in charge of banking supervision to the BNB Governing Council.
  - Creation of an internal advisory Council to advise on issues related to the implementation of supervisory measures.
  - Separation of on-site and off-site inspection teams has been completed.
  - Substantial recruitment and training of staff is under way.

### Legal Framework and Supervisory Powers
- The legal framework has been slightly revised to expand BNB’s powers for imposing supervisory measures.
- Expanded powers include the authority to:
  - dismiss members of Boards or senior management,
  - replace bank auditors.

### Supervisory Effectiveness and Process Upgrades
- Substantial effort is being carried out, with IMF staff support, to upgrade the effectiveness of the supervisory function.
- Main efforts and priorities:
  - Finalize a comprehensive supervisory manual that outlines the supervisory process by defining the rights and obligations of the Banking Supervision Department and its individual directorates and clarifying their interactions.
  - After the manual is finalized, undertake a full review of ordinances, internal rules and supervisory guidelines to enhance them and align them with Basel principles where necessary.
  - Work areas to be included:
    - banks’ governance,
    - internal control and risk management,
    - reduction of connected/related-party lending.

### Transparency, Follow-up, and Accountability
- The Action Plan is subject to regular follow-up to support transparency and accountability in banking supervision.
- Recruitment, training, and organizational changes are ongoing to implement the Plan’s objectives.

*Source: Appendix III. Improving Bank Supervision (excerpt).*

### 6. The Bulgarian government’s current priority is to prevent further accumulation of interest

### 6. The Bulgarian government’s current priority is to prevent further accumulation of interest

### Current priority and recent legislative action
- The government’s current priority is to prevent further accumulation of interest on NEK’s obligation as a priority.
- Parliament has recently adopted a special law to extend an uncollateralized interest-free loan to NEK by mobilizing the government deposits.
- The implementation of the law is conditional to the EC’s positive opinion.

### Short-term implementation condition
- Implementation of the special law is conditional to the EC’s positive opinion.

### Exploration of permanent solutions
- The government is exploring a permanent solution—that is to remove the equipment from NEK’s balance sheet.
- The Ministry of Energy indicated that options for the permanent solution include:
  - (i) selling the equipment to a third country, and
  - (ii) resume the project by attracting private investors.

### Constraint on one permanent option
- The option of selling the equipment to a third country requires Atomstroyexport’s agreement.

*Source: _cr16344 - 6. The Bulgarian government’s current priority is to prevent further accumulation of interest*

### 2.      Based on the revised data, staff has raised the GDP growth projection for

### _cr16344 - 2.      Based on the revised data, staff has raised the GDP growth projection for

### Growth projection revisions
- Staff raised the GDP growth projection for 2016 to 3¼ percent from 3 percent in the staff report.
- Rationale for revision:
  - Increased carryover from 2015.
  - Stronger outturn for the first half of 2016.
- Medium-term projections:
  - Projections for medium-term actual growth and potential growth were maintained at around 2½ percent.
  - Reasoning: longer term constraints to higher growth as laid out in the staff report remain unchanged (see paragraph 8 of the staff report).
- Assessment impacts:
  - The revised growth projection does not change staff’s overall assessment about Bulgaria’s external position in 2015 (see Annex I of staff report).
  - The revision does not change staff’s assessment about the country’s debt sustainability (see Annex II of the staff report).

### Fiscal and external ratios (implications of revised nominal GDP)
- Effect of higher denominator (revised nominal GDP) on 2015 ratios:
  - 2015 government debt-to-GDP ratio declined to 25.6 percent of GDP (from 26.3 percent previously).
  - 2015 fiscal cash deficit fell to 2.8 percent of GDP (compared to 2.9 percent).
  - External debt dropped to 76.1 percent of GDP (from 78.1 percent previously).
- Projections updated:
  - Staff projections for government and external debt and fiscal deficit in terms of GDP have been revised slightly downward.
- Data provision:
  - A complete set of tables with the revised historical data and updated projections is attached.

*Source: _cr16344 - 2.      Based on the revised data, staff has raised the GDP growth projection for*

### 4.      Based on new releases staff has also slightly raised the inflation projection

### _cr16344 - 4.      Based on new releases staff has also slightly raised the inflation projection

### Inflation projection and recent price developments
- Staff revised up the average HICP inflation projection for 2016 to -1.3 percent from -1.6 percent in the staff report.
- Recent data releases show a decelerating pace of declines in energy and transportation prices.

### Macroeconomic outlook and real activity
- Real GDP growth:
  - 2015: 3.6
  - 2016 (proj.): 3.3
  - 2017 (proj.): 2.9
  - 2018–2021 (proj.): 2.5, 2.5, 2.5, 2.5
- Real domestic demand:
  - 2015: 3.5
  - 2016 (proj.): 2.9
- Output gap (percent of potential GDP):
  - 2015: -1.4
  - 2016 (proj.): -0.5
  - 2017 (proj.): -0.1
  - 2018–2021 (proj.): 0.0, 0.0, 0.0, 0.0
- Unemployment rate (percent of labor force):
  - 2015: 9.2
  - 2016 (proj.): 8.2
  - 2017–2021 (proj.): 7.1, 6.9, 6.7, 6.6, 6.5

### Prices, wages, and external prices
- GDP deflator:
  - 2015: 2.2
  - 2016 (proj.): -0.3
  - 2017 (proj.): 0.6
  - 2018–2021 (proj.): 1.6, 1.9, 2.1, 2.1
- Consumer price index (HICP, end of period):
  - 2015: -0.9
  - 2016 (proj.): -0.8
  - 2017–2021 (proj.): 1.4, 1.8, 2.0, 2.1, 2.1
- Consumer price index (HICP, average) row (Table 2) shows 2016: -1.3 (consistent with staff revision)
- Nominal wages (percent change):
  - 2015: 8.8
  - 2016 (proj.): 8.1
  - 2017 (proj.): 7.4
  - 2018–2021 (proj.): 6.7, 6.0, 5.3, 4.6

### Fiscal outcomes and projections
- General government net lending/borrowing (cash basis, percent of GDP):
  - 2015: -2.8
  - 2016 (proj.): -0.7
  - 2017 (proj.): -1.1
  - 2018–2021 (proj.): -0.7, -0.3, 0.0, 0.0
- General government primary balance (percent of GDP):
  - 2015: -2.0
  - 2016 (proj.): 0.0
  - 2017 (proj.): -0.2
  - 2018–2021 (proj.): 0.2, 0.6, 0.9, 0.9
- General government gross debt (percent of GDP):
  - 2015: 25.6
  - 2016 (proj.): 28.7
  - 2017–2021 (proj.): 25.4, 25.1, 24.3, 23.2, 22.2
- Authorities’ fiscal strategy and near-term targets:
  - 2016 fiscal consolidation is ahead of schedule; authorities commit to saving 2016 revenue over-performance to strengthen fiscal buffers.
  - Consolidated government deficit in 2017 is projected at 1.4 percent of GDP on cash basis; structural deficit projected to decline to 0.5 percent of GDP.
  - Social security contributions will be increased by one percentage point in the next two years.
  - In 2017, Bulgaria does not plan to tap international markets; domestic debt operations limited to refinancing matured securities.

### Financial stability and banking sector
- Bulgarian National Bank (BNB) actions:
  - Implemented a Plan on Reforms and Development of Banking Supervision (October 2015).
  - Transposed the Bank Recovery and Resolution Directive (BRRD) into Bulgarian law (mid-August 2015) and established a new directorate on bank resolution.
  - Concluded an AQR and stress test of the banking system (August 2016).
- AQR and stress test findings:
  - AQR identified adjustments of BGN 665 million, or 1.3 percent of total risk-weighted assets, as necessary to be reflected in banks’ 2016 financial statements; the impact has been mitigated by realized net income and additional impairments and capital measures through mid-2016.
  - Stress test confirmed a strong capital position and resilience to shocks.
- Banking-sector financial soundness indicators (selected, end-period unless noted):
  - Capital to risk-weighted assets: 2015: 21.9; 2016 (March): 22.9
  - Tier 1 capital to risk-weighted assets: 2015: 20.0; 2016 (March): 21.4
  - Nonperforming loans to total gross loans: 2015: 16.7; 2016 (March): 20.2
  - Return on assets: 2015: 0.9; 2016 (March): 1.4
  - Liquid assets to short-term liabilities: 2015: 33.7; 2016 (March): 41.2
- Other stability measures:
  - BDIF signed agreements with the WB and the EBRD for two government-guaranteed loans to repay the BDIF loan from the Ministry of Finance.
  - IMF/WB FSAP started in second half of 2016; results to be presented to the IMF Board in May 2017.
  - Financial Supervision Commission plans an AQR of pension funds and insurance companies and a stress test of insurance and re-insurance industry by end-2016.

### External sector and reserves
- Current account balance (percent of GDP):
  - 2015: 0.4
  - 2016 (proj.): 1.6
  - 2017 (proj.): 0.5
  - 2018–2021 (proj.): 0.0, -0.4, -1.0, -1.7
- Merchandise trade balance (percent of GDP):
  - 2015: -5.8
  - 2016 (proj.): -6.3
  - 2017–2021 (proj.): -6.9, -6.9, -6.9, -7.0, -7.0
- Gross international reserves (billions of euros, memorandum):
  - 2015: 20.3
  - 2016 (proj.): 21.7
  - 2017–2021 (proj.): 22.4, 23.3, 24.0, 24.4, 24.5

### Monetary aggregates and credit
- Broad money (annual percent change):
  - 2015: 8.8
  - 2016 (proj.): 5.6
  - 2017–2021 (proj.): 4.9, 5.5, 5.9, 6.0, 6.1
- Domestic private credit (annual percent change):
  - 2015: -1.6
  - 2016 (proj.): 1.2
  - 2017–2021 (proj.): 6.5, 7.2, 7.2, 7.3, 7.3
- Monetary survey (end-December levels, selected):
  - Broad money (M3, billions of leva): 2015: 74.0; 2016 (proj.): 78.1
  - Net foreign assets (billions of leva): 2015: 40.7; 2016 (proj.): 43.3
  - Net domestic assets (billions of leva): 2015: 51.7; 2016 (proj.): 50.3

### Structural reforms and policy priorities
- Authorities’ priorities and planned measures:
  - Continue policies around the currency board to anchor macroeconomic, monetary, and financial stability.
  - Implement action plan to improve the business environment and advance the anti-corruption agenda to attract private investment.
  - Active labor market policies to stimulate labor force participation, mitigate emigration effects, and better protect the poor.
  - Reforms in public education and health care to achieve more targeted and efficient public expenditure and enhance productivity of public investment.
  - Increase social security contributions by one percentage point over the next two years to address pension system weaknesses.
  - Improve EU funds utilization and implement the Public Procurement Act to reduce procurement deficiencies.
  - Strengthen monitoring and inclusion of state-owned enterprises in the General Government sector; introduce municipal financial recovery mechanisms; appoint Fiscal Council members.

*Source: IMF staff report and Bulgarian authorities’ statement as provided in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16344.pdf_