IMF Executive Board Concludes 2022 Article IV Consultation with Bulgaria
IMF News, June 24, 2022
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- Published: June 24, 2022
Executive Board assessment and headline findings
- The Executive Board concluded the Article IV consultation with Bulgaria and endorsed the staff appraisal without a meeting.
- The war in Ukraine has clouded the outlook, heightened uncertainty, and increased downside risks.
- Key risks identified:
- Stronger spillovers from the war, including disruptions in energy supply.
- A resurgence of COVID-19.
- Protracted supply-chain disruptions.
- Faster-than-anticipated tightening of global financing conditions.
- High energy dependance from Russia is highlighted as a significant vulnerability.
Recent economic performance (pandemic rebound and inflation)
- Bulgaria showed resilience through the pandemic; GDP surpassed its pre-crisis level by mid-2021.
- Growth and demand:
- Real GDP growth reached 4.2 percent in 2021.
- Growth in 2022 is projected at 2.8 (see Table 1 for full series).
- Strong consumption in 2021 supported by significant fiscal support and buoyant wage growth.
- Inflation dynamics:
- Inflation accelerated significantly, reaching double-digit in March 2022 and was broad-based.
- Consumer price index (HICP, end of period) values by year: 3.1 (2019), 6.6 (2021), 11.6 (2022).
Fiscal policy guidance and public spending recommendations
- Fiscal policy needs to be flexible given large uncertainty from the war and global shocks.
- Assessment of the 2022 budget:
- The 2022 budget adopted in February is judged to strike a reasonable balance between supporting the incomplete recovery and avoiding further inflationary pressures.
- The planned mid-year budget revision should be approached flexibly to reprioritize spending and respond to emerging needs.
- If activity disappoints significantly, a possibly looser fiscal stance may be warranted.
- Composition of public spending:
- A review of the composition of public spending is needed already this year.
- Reorientation toward more public investment is welcome, but the magnitude of the planned increase may run against absorption capacity and requires phasing in new projects more gradually.
- The nominal freeze of the wage bill is no longer desirable with high inflation.
- Mid-year revision should account for needs such as supporting refugees.
- Targeting of support and tax policy:
- Existing subsidies to companies and price caps should be gradually shifted to direct support to vulnerable households to cope with high energy prices.
- The reduction in VAT rates should be discontinued, as the measure is regressive and no longer needed.
- Medium-term fiscal stance:
- Planned medium-term fiscal consolidation is broadly appropriate and should be accompanied by expenditure and revenue-management reforms.
- Drivers for fiscal prudence: aging and shrinking population, the currency board arrangement, and the need to preserve buffers given uncertain external environment.
- Expand fiscal space by increasing efficiency of public spending and reviewing taxation to increase revenue and redistribution.
- A holistic review of the pension system is recommended to target sustainability and adequate pension levels.
Financial sector and macroprudential policy
- Macroprudential measures during the pandemic strengthened banks’ balance sheets and helped maintain credit flows.
- Given accelerating credit growth to households, authorities have recently tightened macroprudential policy.
- Banking sector status:
- Overall, the banking sector remains well capitalized and liquid.
- The financial sector has very little direct exposure to Russia or Ukraine; systemic risks appear low.
- Ongoing vigilance required:
- Credit risk may rise because of surging commodity prices, supply-chain disruptions, rising interest rates, withdrawal of COVID-19 support, or housing market imbalances.
- Authorities should continue to monitor asset quality and ensure banks proactively manage risks and maintain strong capital positions.
Structural reforms and longer-term priorities
- Accelerating structural reforms is crucial to raise living standards and promote a more competitive, inclusive, and green economy.
- Euro area accession in sight increases importance of policies that foster income convergence with EU partners.
- Governance and rule-of-law actions:
- Government focus on strengthening governance and fighting corruption is welcome.
- Steadfast efforts to improve effectiveness of judicial and anticorruption systems are essential.
- Productivity and green transition:
- Ongoing efforts to harness digital technologies and foster innovation are needed to raise productivity.
- Effective implementation of planned investment in renewables and energy efficiency will strengthen energy security and reduce carbon footprints.
- When energy prices decline, incentives for green transition could be supported by price-based mechanisms and fiscal tools.
- NGEU funds have a key role to play to support efforts in these areas.
Key statistics (Table 1 highlights: Bulgaria: Selected Economic Indicators, 2018–22)
- Real GDP (annual percent change)
- 2018: 2.7
- 2019: 4.0
- 2020: -4.4
- 2021: 4.2
- 2022 Proj.: 2.8
- Real domestic demand
- 2018: 5.5
- 2019: 4.9
- 2020: 0.1
- 2021: 6.0
- 2022 Proj.: 3.6
- Public consumption
- 2018: 5.4
- 2019: 2.0
- 2020: 8.3
- 2021: 6.2
- Private consumption
- 2018: 3.7
- 2019: -0.4
- 2020: 8.0
- 2021: 2.6
- Gross capital formation
- 2018: 10.9
- 2019: 4.1
- 2020: -5.0
- 2021: 4.5
- Private investment
- 2018: -2.3
- 2019: 6.7
- 2020: -5.5
- 2021: -1.7
- Public investment
- 2018: 36.8
- 2019: 7.2
- 2020: -16.6
- 2021: -30.5
- 2022 Proj.: 37.1
- Exports of goods and services
- 2018: 1.7
- 2019: -12.1
- 2020: 9.9
- 2021: 3.9
- Imports of goods and services
- 2018: 5.8
- 2019: 5.2
- 2020: -5.4
- 2021: 12.2
- 2022 Proj.: 5.0
- Potential GDP (resource utilization)
- 2018: 3.0
- 2019: -1.4
- 2020: 2.3
- Output gap (percent of potential GDP)
- 2018: 0.2
- 2019: -3.1
- 2020: -0.5
- Unemployment rate (percent of labor force)
- 2018: 5.3
- 2019: 4.3
- 2020: 5.1
- Price indicators
- GDP deflator 2018: 13.9
- Consumer price index (HICP, average) 2019: 2.5
- Consumer price index (HICP, end of period) 2019: 3.1; 2021: 6.6; 2022: 11.6
- Fiscal indicators (percent of GDP)
- General government net lending/borrowing (cash basis) 2018: -1.0; 2019: -2.9; 2020: -2.8
- General government primary balance 2018: 0.7; 2019: -2.4; 2020: -2.5
- Cyclically adjusted overall balance (percent of potential GDP): -2.6
- General government gross debt 2018: 20.1; 2019: 18.3; 2020: 23.3; 2021: 23.8; 2022 Proj.: 23.1
- Monetary aggregates
- Broad money 2018: 8.8; 2019: 10.7; 2020: 16.6
- Domestic private credit 2018: 8.9; 2019: 9.7; 2020: 15.8
- Exchange rates regime
- Leva per U.S. dollar (end of period) 2018: 1.8; 2019: 1.6
- Nominal effective rate 2018: 3.3; 2019: -0.1
- External sector (percent of GDP)
- Current account balance 2018: 0.9; 2019: 1.9; 2020: -1.3
- Merchandise trade balance 2018: -4.8; 2019: -4.7; 2020: -3.2; 2021: -4.9; 2022 Proj.: -6.1
- Net international investment position 2018: -37.0; 2019: -30.2; 2020: -27.1; 2021: -19.7; 2022 Proj.: -16.3
IMF Communications Department, Press Release No. 22/223, June 24, 2022.