IMF Executive Board Concludes the 2019 Article IV Consultation with Bulgaria

March 22, 2019

On March 20, 2019,the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Bulgaria.

The Bulgarian economy continues to grow strongly, supported by buoyant domestic demand. Growth exceeded 3 percent in 2018 and is projected to maintain its momentum in 2019. Capacity constraints are becoming more binding yet inflationary pressure has eased after peaking in August last year, reflecting developments in commodity and tourism-related prices. The unemployment rate has reached a historical low and wages are rising rapidly amid increasing skill shortages. The current account surplus remained sizable in 2018 but is projected to decline. Risks are tilted to the downside especially from weaker-than-expected growth of trading partners.

The fiscal balance recorded a small surplus of 0.1 percent of GDP in 2018, exceeding the budgeted deficit of 1 percent of GDP, owing to strong revenue performance and capital underspending. Credit growth has picked up across the board. The banking sector is profitable and asset quality continues to improve. Non-performing loans have fallen below 9 percent of total loans in 2018Q3. The central bank has made steady progress in strengthening banking sector supervision.

Robust economic performance needs to translate into sustainable and inclusive growth. Bulgaria’s income level is still half of the EU average and income inequality is high among EU countries. It also faces long-term growth and fiscal challenges due to demographic headwinds.

The Bulgarian authorities and ERM II parties have agreed that Bulgaria will join ERM II and the banking union simultaneously upon completing several commitments. These include strengthening financial sector supervision, improving SOE governance, and strengthening the anti-money laundering (AML) framework.

Executive Board Assessment [2]

Executive Directors welcomed Bulgaria’s robust economic growth, historically low unemployment, and improved financial sector conditions. While prospects remain good, Directors considered that downside risks have recently risen, emanating mostly from the weakening in trading‑partner growth and global trade. With sound macroeconomic policies in Bulgaria, Directors emphasized the need to implement broad‑based structural reforms to boost potential growth, accelerate EU income convergence, and address unfavorable demographic dynamics. Improving the efficiency of public spending, the quality of public institutions, and the governance framework will be key to bolstering prospects.

Directors welcomed the strong fiscal outturn in 2018, and supported the authorities’ fiscal policy plan to preserve buffers against downside risks. They were reassured that Bulgaria’s low public debt provides ample room to allow automatic stabilizers to operate in the event of a negative shock. Directors encouraged the authorities to continue to improve revenue and spending efficiency.

Directors highlighted that sound institutions are important to support inclusive and sustainable growth over the medium term, and encouraged the authorities to maintain the reform momentum through effective implementation. They considered that stronger public investment management will have dual benefits of improving investment efficiency and strengthening public institutions. Directors welcomed recent progress on reforms to improve the judiciary and the fight against corruption, and commended the authorities’ plan to strengthen the anti‑money laundering framework and governance of state‑owned enterprises.

Directors stressed that improving education and healthcare and addressing labor market bottlenecks would enhance human capital and mitigate labor shortages and skill mismatches. Directors emphasized that effective labor market policies and a deeper collaboration between educational institutions and business could help alleviate these challenges.

Directors commended the authorities’ progress in strengthening financial supervision, including operationalizing the new governance framework, strengthening legislation for related‑party lending, and formalizing the supervisory review and evaluation process. They welcomed the recent decline in non‑performing loans (NPLs), and encouraged the central bank to ensure that banks with high NPLs maintain sufficient capital buffers.

Directors noted that Bulgaria’s preparations for ERM II and the banking union would help support reforms and enhance the quality of institutions, including by strengthening financial sector supervision.

Bulgaria: Selected Economic Indicators, 2015–19 1/

2015

2016

2017

2018

2019

Est.

Proj.

Real GDP

3.5

3.9

3.8

3.2

3.3

Real domestic demand

3.3

1.7

4.9

6.3

4.9

Public consumption

1.4

2.2

3.7

3.8

4.2

Private consumption

4.5

3.5

4.5

7.0

5.0

Gross capital formation

1.5

-4.3

7.3

5.7

5.2

Private investment

-3.4

-1.5

6.4

2.4

4.0

Public investment

20.3

-18.6

-5.9

13.5

10.1

Stock building 2/

-0.2

0.5

0.8

0.2

0.0

Net exports 2/

0.1

2.2

-1.1

-3.2

-1.8

Exports of goods and services 3/

5.7

8.1

5.8

-1.5

2.7

Imports of goods and services

5.4

4.5

7.5

3.2

5.3

Resource utilization

Potential GDP

2.7

3.0

3.2

3.2

3.2

Output gap (percent of potential GDP)

-1.2

-0.4

0.2

0.2

0.2

Unemployment rate (percent of labor force)

9.2

7.7

6.2

4.7

5.0

Price

GDP deflator

2.2

2.2

3.4

3.1

2.9

Consumer price index (HICP, average)

-1.1

-1.3

1.2

2.6

2.4

Consumer price index (HICP, end of period)

-0.9

-0.5

1.8

2.3

2.2

Fiscal indicators (percent of GDP)

General government net lending/borrowing (cash basis)

-2.8

1.6

0.8

0.1

-0.6

General government primary balance

-2.0

2.3

1.6

0.8

-0.1

Structural overall balance

-2.4

1.7

0.8

0.1

-0.7

Structural primary balance

-1.6

2.5

1.5

0.7

-0.1

General government gross debt

25.6

27.4

23.3

20.5

19.3

Monetary aggregates

Broad money

8.8

7.6

7.7

8.8

8.0

Domestic private credit

-1.6

1.8

4.5

8.9

7.1

Exchange rates regime

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

1.8

1.9

1.6

1.7

…

Nominal effective rate

-1.2

2.5

3.1

5.0

…

External sector (percent of GDP)

Current account balance

0.0

2.6

6.5

4.6

2.2

o/w: Merchandise trade balance

-5.8

-2.0

-1.5

-4.1

-4.9

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

1/ Data as of February 28, 2019.

2/ Contribution to GDP growth.

3/ Exports suffered from maintenance work in the main refinery in 2018 and are expected to recover in 2019.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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