{
  "title": "Bulgaria—2010 Article IV Consultation, Concluding Statement",
  "publication": "IMF News, March 3, 2010",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs030110",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "publishDate": "2010-03-03",
  "sections": [
    {
      "heading": "Background and recent developments",
      "content": "- Large capital inflows prior to the global crisis generated a domestic demand boom, delivering strong GDP and employment growth but widening the current account deficit to very high levels and producing overheating with high wage growth and double-digit inflation.\n- The boom ended in Q4 2008 following the default of Lehman Brothers. Capital inflows contracted sharply and exports fell due to recessions in trading partners.\n- GDP contracted by 5.1 percent in 2009—the first decline since the crisis of 1996/97."
    },
    {
      "heading": "Economic outlook (mission projections)",
      "content": "- Real GDP is projected to increase by 0.2 percent in 2010.\n- Domestic demand is expected to decline further driven by:\n  - Unwinding investment boom and tightened credit → investment likely to drop further.\n  - Declining employment → private consumption expected to suffer.\n- Current account deficit projected to narrow from 8½ percent in 2009 to 5½ percent of GDP in 2010.\n- Inflation projected at about 2.2 percent in 2010, with almost half reflecting higher excise duties.\n- Unemployment expected to increase from an estimated 7.8 percent in 2009 to 9.2 percent in 2010."
    },
    {
      "heading": "Adjusting to lower capital inflows — private sector and policy implications",
      "content": "- Capital inflows expected to recover somewhat over time but remain well below pre-2009 highs; both the private sector and public policies must adjust.\n- Private sector adjustments:\n  - Shift resources from non-tradable to tradable sector (non-tradable expansion during boom driven by construction, real estate and banking).\n  - Wage growth needs to slow considerably in 2010 and remain moderate over the medium term.\n  - Wage growth decline observed: peak of 25 percent y/y in Q2 2008 to 10.6 percent y/y in Q4 2009; temporary statistical effects may still inflate current wage growth which is likely to decline further.\n- Public policy adjustments:\n  - In 2007 and 2008, expenditure grew by 18 percent annually as revenues surged and were used to increase expenditure rather than fiscal surpluses.\n  - Continuation of past spending trends would have converted the fiscal surplus into a large deficit, eroding public sector buffers that support the currency board.\n- Private sector vulnerabilities:\n  - Private sector external debt is 102 percent of GDP.\n  - Foreign currency debt of the non-financial private sector amounts to 80 percent of GDP.\n  - External environment is more benign than a year earlier but risks remain, including from euro area developments.\n- Euro area membership preparation:\n  - The currency board is a pillar of stability; eventual euro adoption is described as the only viable exit strategy.\n  - Maintaining fiscal discipline and deepening structural policies is necessary to meet the Maastricht criteria and avoid re-emergence of imbalances."
    },
    {
      "heading": "Fiscal policy — recent correction, 2010 challenges, and medium-term guidance",
      "content": "- 2009 fiscal correction:\n  - Sharp spending cuts in H2 2009 and reforms of tax administration and customs contained the cash deficit to 0.8 percent of GDP; arrears built up widened the deficit to around 1.9 percent in ESA-95 (accrual) terms.\n  - Expenditure initially grew by 24.5 percent y/y in the first seven months of 2009 before the cuts.\n- 2010 fiscal challenges:\n  - Government cash deficit target: 0.7 percent of GDP.\n  - Short-term revenue projections seem optimistic given H2 2009 shortfalls.\n  - Recent increases in excise duties and reforms to improve tax compliance help but may not offset receipt deterioration and a 2 percentage point cut in the social security contribution rate.\n  - Budgeted measures: public wage and general pension freezes, streamlining public administration, stricter controls on health care spending.\n  - Repayment of 2009 arrears will add pressure on the cash deficit though they do not affect ESA-95 deficit; mission projects a cash deficit of 1.8 percent of GDP for 2010.\n  - Emphasis that budgeted spending limits must be closely adhered to; large deficits could endanger macroeconomic stability and the currency board arrangement.\n- Medium-term fiscal framework recommendations:\n  - Focus on overall spending envelope rather than headline balances within a medium-term budgetary framework.\n  - Target real spending growth in line with cautious estimates of potential GDP growth to make public spending more predictable and contain intra-year adjustments.\n  - Use revenue windfalls to build fiscal buffers for revenue shortfalls.\n  - Tax rate reductions should be offset by further expenditure reductions.\n  - Cautions:\n    - Lowering social security contribution rates could widen the social security financing gap and require larger government transfers, risking medium-term balanced budget targets and pension sustainability.\n    - Mission advises against a cut in VAT rates at the current juncture because the budget relies heavily on VAT and exports are exempt from VAT, so competitiveness gains would be weak.\n- Fiscal policy to support export-led adjustment:\n  - Rationalize and increase efficiency of public administration and improve absorption of EU funds to free space for infrastructure and productivity-raising spending (education and training).\n  - Contain public wage growth (public wage freeze in 2010; future increases aligned with productivity) to support budget constraint and competitiveness.\n  - Ensure sustainability of social pension systems via urgent reforms:\n    - Slow pension increases after the 2010 freeze.\n    - Adjust pension system parameters (including increasing retirement age or minimum years of contribution).\n    - Address underreporting of insurable income and revise parameters creating inefficiencies.\n  - Comprehensive health care reform to improve efficiency and quality; address proliferation of hospitals and rising financing pressures; swift completion of broad-based reform is crucial.\n  - Renewed privatization push to expand private sector role and replenish fiscal reserve account."
    },
    {
      "heading": "Other structural reforms",
      "content": "- Strengthen business climate by cutting red tape and reducing regulatory costs.\n- Decisively tackle the high share of the informal economy and corruption.\n- Improve legal and institutional frameworks to support corporate workouts, restructuring and bankruptcy procedures.\n- Mission welcomes authorities’ plan to assess and amend the corporate insolvency framework to support faster resolutions and creditor-debtor trust."
    },
    {
      "heading": "Financial system — stability, buffers, and main challenges",
      "content": "- Global liquidity pressures have abated; stabilization of Western European banking reduces external funding risks.\n- Domestic interest rates have started to come down; credit growth shows signs of stabilization after a sharp slowdown in H1 2009.\n- Main banking challenge: absorb increase in non-performing loans.\n- System buffers and indicators at end-2009:\n  - Reported aggregate capital adequacy ratio at end-2009 was 17 percent (regulatory minimum 12 percent; EU minimum 8 percent).\n  - Coverage ratio of non-performing loans by provisions exceeded 80 percent.\n  - Banks continued to report profits in 2009.\n- Policy recommendations for financial sector:\n  - Supervisors’ enforcement of a cautious dividend policy remains appropriate.\n  - Contingency planning is essential; mission welcomes creation of a financial stability unit at the BNB.\n\nConcluding statement issued in Sofia, March 1, 2010; Mission concluding statement published March 3, 2010.\n\n---\n\n\n References\n\n- Bulgaria and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs030110"
    }
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    "Published: March 3, 2010",
    "Large capital inflows prior to the global crisis generated a domestic demand boom, delivering strong GDP and employment growth but widening the current account deficit to very high levels and producing overheating with high wage growth and double-digit inflation.",
    "The boom ended in Q4 2008 following the default of Lehman Brothers. Capital inflows contracted sharply and exports fell due to recessions in trading partners.",
    "GDP contracted by 5.1 percent in 2009—the first decline since the crisis of 1996/97.",
    "Real GDP is projected to increase by 0.2 percent in 2010.",
    "Domestic demand is expected to decline further driven by:",
    "Current account deficit projected to narrow from 8½ percent in 2009 to 5½ percent of GDP in 2010.",
    "Inflation projected at about 2.2 percent in 2010, with almost half reflecting higher excise duties.",
    "Unemployment expected to increase from an estimated 7.8 percent in 2009 to 9.2 percent in 2010.",
    "Capital inflows expected to recover somewhat over time but remain well below pre-2009 highs; both the private sector and public policies must adjust.",
    "Private sector adjustments:",
    "Public policy adjustments:",
    "Private sector vulnerabilities:",
    "Euro area membership preparation:",
    "2009 fiscal correction:",
    "2010 fiscal challenges:",
    "Medium-term fiscal framework recommendations:",
    "Fiscal policy to support export-led adjustment:",
    "Strengthen business climate by cutting red tape and reducing regulatory costs.",
    "Decisively tackle the high share of the informal economy and corruption.",
    "Improve legal and institutional frameworks to support corporate workouts, restructuring and bankruptcy procedures.",
    "Mission welcomes authorities’ plan to assess and amend the corporate insolvency framework to support faster resolutions and creditor-debtor trust.",
    "Global liquidity pressures have abated; stabilization of Western European banking reduces external funding risks.",
    "Domestic interest rates have started to come down; credit growth shows signs of stabilization after a sharp slowdown in H1 2009.",
    "Main banking challenge: absorb increase in non-performing loans.",
    "System buffers and indicators at end-2009:",
    "Policy recommendations for financial sector:",
    "[Bulgaria and the IMF](http://www.imf.org/external/country/BGR/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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