Bulgaria: Staff Concluding Statement of the 2020 Article IV Mission
IMF News, February 14, 2020
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- Published: February 14, 2020
Mission visit and purpose
- An International Monetary Fund (IMF) mission, led by Mr. Jaewoo Lee, visited Sofia during February 4-14 to conduct the 2020 Article IV consultation.
- Publication date: February 14, 2020.
Macroeconomic assessment and outlook
- Bulgaria’s economic policy challenge: reinvigorate inclusive growth and sustained income convergence.
- Recent performance:
- Bulgaria’s economy had robust growth in 2019 and unemployment fell to a record low.
- The fiscal position is strong.
- The external position remains strong, with the current account recording a large surplus.
- Fiscal outlook:
- The fiscal account is projected to move back from a one-off deficit in 2019 to balance this year and over the medium term.
- If downside external risks materialize, automatic fiscal stabilizers should be allowed to play freely and public spending that supports investment could be raised.
- Risks and medium-term challenge:
- Another robust economic performance is widely expected for 2020, albeit with softer growth and subject to downside external risks.
- The distance to high incomes elsewhere in the EU remains large; income inequality is high; demographic headwinds exist.
- Achieving more inclusive growth and faster income convergence requires structural reforms to improve governance, loosen labor shortages, strengthen education, and alleviate inequality.
Improving public services and governance
- Fiscal space and objectives:
- Bulgaria’s strong fiscal and external positions provide room to increase the level of fiscal spending.
- There is scope for greater revenue mobilization to maintain a balanced budget over the medium term, which is an appropriate objective.
- Small deficits that serve to support growth-enhancing spending measures would also be appropriate, provided public debt remains around its present low level.
- Public investment and EU funds:
- Improving public investment management would increase investment efficiency and set the stage for increasing the level of public investment.
- The forthcoming nation-wide application of the e-procurement system is welcomed.
- Encourage developing standard guidelines for project appraisal and improving multi-year budgeting.
- The absorption rate of the EU funds has improved over that of the previous cycle; better planning for future EU funds would reduce backloading and support more efficient investment.
- Revenue administration and tax policy:
- More effective revenue collection would increase usable resources and improve public sector efficiency and transparency.
- Options include reducing the sizable VAT compliance gap and increasing the property tax.
- A diagnostic based on the IMF’s framework, Tax Administration and Diagnostic Assessment Tool, could help assess administrative capacity and identify improvements.
- Governance and SOEs:
- Progress expected in strengthening the judiciary and implementing the framework for state-owned enterprise (SOE) governance.
- Government plans to operationalize a post-monitoring council following favorable recognition in the European Commission’s Cooperation and Verification Mechanism.
- Legislation on SOE governance has been aligned with the OECD guidelines (a commitment for ERM II); strong implementation should follow, including for ownership policy, financial oversight and board qualification.
Investing in people
- Social protection and inequality:
- Bulgaria’s inequality is already high and has been rising; social protection spending (as a share of GDP) and the effectiveness of fiscal redistribution have been falling.
- Recommendation: review the level, targeting, and composition of social protection spending, and consider increasing such spending to better cover broader social risks.
- Without necessarily revisiting the social contract around the flat income tax, the redistributive role of taxation could be increased, for example, by increasing the maximum insurable income.
- Labor market policies:
- Endorses ongoing policies to reduce labor shortages (worker importation agreements, efforts to bring back overseas Bulgarians, training programs).
- Recommendation: strengthen active labor market policies (ALMPs); spending on ALMPs is low relative to other EU countries.
- Suggested ALMP priorities: training, start-up incentives, and private sector employment programs to reduce long-term unemployment (LTU) and improve job matching efficiency.
- Education and human capital:
- There is room to increase public spending on education, which remains low among EU countries, while ensuring efficiency.
- Higher spending could support teaching of digital skills, modernization of the education system, assistance for NEET and early school leavers, promoting equal access to quality education, and raising teacher salaries.
- Greater involvement of business could align university curricula with labor market needs; teacher wage hikes should be complemented by measures to attract and retain high-performance teachers.
Strengthening the financial sector
- Supervision and buffers:
- The Bulgarian National Bank (BNB) continues a conservative approach to financial supervision with emphasis on capital buffers.
- BNB has been raising the countercyclical capital buffer gradually.
- More narrowly targeted macro-prudential measures (e.g., borrower-based ones) could be deployed if excessive growth risks emerge in certain credit segments.
- Non-performing loans (NPLs) and insolvency:
- NPL reduction slowed in 2019 after rapid declines since 2015; the NPL ratio remains well above the EU average.
- The mission encourages renewed efforts to reduce NPLs; welcomes BNB’s adoption of the European Banking Authority’s NPL guidelines.
- Reforms to improve the insolvency framework (another ERM II commitment) could help reduce NPLs.
- Joining the European banking union:
- Joining the banking union awaits the satisfactory recapitalization of two banks identified under the ECB’s comprehensive review, a pending requirement.
- Upon joining the banking union (as a non-euro area country), significant institutions will fall under direct ECB supervision, as Bulgaria joins both the Single Supervisory Mechanism and Single Resolution Mechanism.
- Preparations for ERM II and the banking union have included strengthening the anti-money laundering framework and supervision of the non-bank financial sector.
Potential gains from successful reforms
- Successful reforms could bring appreciable efficiency gains and catalyze higher investment.
- Higher, more efficient investment is necessary for sustaining faster growth and convergence and would help moderate Bulgaria’s current account surplus.
- More and better spending on government services could also moderate savings and the current account surplus.
Closing
- The mission thanks the authorities and other counterparts for the constructive dialogue and kind hospitality.
Source: Bulgaria: Staff Concluding Statement of the 2020 Article IV Mission (February 14, 2020).