{ "title": "Bulgaria: Staff Concluding Statement of the 2016 Article IV Mission", "publication": "IMF News, September 16, 2016", "sourceUrl": "https://www.imf.org/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission", "canonical": "https://www.imf.org/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission", "overlayPath": "/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission/index.md", "summary": "The economy withstood the failure of the fourth largest bank in 2014 and spillovers from the Greek crisis in 2015.", "publishDate": "2016-09-16", "sections": [ { "heading": "Context: Short term resilience but long term challenges", "content": "- The economy withstood the failure of the fourth largest bank in 2014 and spillovers from the Greek crisis in 2015.\n- Current macroeconomic developments are encouraging: output is growing at a steady pace, unemployment is at its lowest level in seven years, and the external current account has remained in surplus.\n- The fiscal balance improved significantly in 2015 and the outturn so far points to a considerable overperformance in 2016.\n- Government debt, despite a noticeable increase in 2014, is among the lowest in Europe.\n- Materially improving economic welfare requires raising potential growth. Bulgaria’s per capita income on a purchasing power parity basis remains less than half of the EU countries’ average.\n- Potential output growth has fallen since the global financial crisis, reflecting subdued investment, slower gains in productivity and adverse demographic developments (aging and emigration).\n- Key structural reform priorities: mitigate effects of aging and emigration, reduce red tape and corruption, improve performance of state-owned enterprises (SOEs), and protect long-term fiscal sustainability against rising health- and pension-related spending pressures." }, { "heading": "Outlook: Slow convergence", "content": "- GDP growth forecast: economy is expected to grow 3 percent in 2016.\n- Mission’s growth forecast revised up reflecting improved sentiment and rising private consumption.\n- Public investment: expected to contract in 2016 as transition to the new EU funds programming period takes hold, but to gather speed in subsequent years.\n- Medium-term potential growth: below the average of similar European countries due to unfavorable demographic trends, slow implementation of structural reforms, and modest private investment outlook.\n- Risks to the outlook:\n - External downside risks: protracted slowdown in the euro area; instability in Turkey; indirect effects of Brexit through impact on the EU and sustained uncertainty.\n - Domestic downside risks: delay in absorption of EU funds; contingent liabilities threatening the fiscal position.\n - Upside scenarios: ambitious structural reforms or a faster recovery in Europe could improve growth prospects." }, { "heading": "Financial system: Restoring credibility", "content": "- Recent measures and oversight steps:\n - New leadership at the Bulgarian National Bank (BNB) and a Plan on Reforms and Development of Banking Supervision adopted in October 2015 and being implemented.\n - An assessment of the Basel Core Principles for Effective Banking Supervision undertaken in 2015.\n - An asset quality review (AQR) and stress test of the banking system completed in August 2016.\n - A Financial Sector Assessment Program (FSAP) is being undertaken jointly by the IMF and the World Bank; scheduled to be finalized in the first half of 2017.\n - Financial Supervision Commission conducting reviews of pension funds’ assets and insurance companies’ balance sheets.\n- AQR and stress test findings and implications:\n - Exercise covered all 22 banks in the system; methodology broadly followed the European Central Bank (AQR) and the European Banking Authority (stress test); assumptions and scenarios were generally conservative.\n - Most of the system remains well-capitalized even after AQR adjustments.\n - AQR results: three banks—the largest domestically-owned bank and two small ones—had to restore the coverage of their capital buffers by an aggregate amount of 0.3 percent of GDP.\n - One of the two small banks has already raised needed capital.\n - The other two banks have until mid-2017 to reach additional capital buffers required by the BNB.\n - Bringing in new bona fide investors would help improve credibility and governance; if banks fail to meet requirements within the announced time frame, authorities should intervene.\n - The AQR and stress test should also help banks prepare for the introduction of new international financial reporting standards (IFRS9).\n- Recommended further actions:\n - Continue reforms to strengthen institutional framework for financial system oversight (new governance structure for bank supervision at the BNB; supportive legislation to strengthen BNB powers to dismiss senior managers, board members and auditors).\n - Use AQR and stress test information to pursue a more risk-based supervisory review and evaluation process; secure adequate resources for more inspections.\n - Tighten legal framework on ultimate beneficial owners and related party lending; BNB to announce a comprehensive set of indicators for early intervention in banks.\n - Reduce NPLs, especially in banks with lower capital ratios; reinforce and monitor the insolvency framework.\n - Strengthen the financial safety net: operationalize the resolution framework and ensure adequate funding for the Bulgarian Deposit Insurance and Banking Resolution funds; minimize use of public funds if needed.\n - Inform initiatives by the FSAP findings." }, { "heading": "Structural reforms: Rekindling Bulgaria’s potential", "content": "- Key reform areas and recommendations:\n - Stimulating private investment:\n - Swiftly implement the authorities’ investment action plan which seeks to remove major regulatory bottlenecks to improve the investment climate.\n - Absorbing EU funds:\n - Ensure a smooth transition to the new EU funds cycle to boost public investment in growth-enhancing areas.\n - Reducing emigration by boosting job prospects at home:\n - Strengthen active labor market policies, promote investment in areas attractive to emigrants, and foster conditions for emigrants to return.\n - Enhancing performance of SOEs:\n - Establish clear performance targets and evaluation tools for SOEs; professionalize SOE boards; have a dedicated unit in government monitor, analyze, and disseminate information on SOEs’ financial performance and fiscal risks.\n - Deregulate, open up to foreign investors, and enhance competition in SOE-dominated industries, in particular the energy sector, to strengthen productivity across the economy.\n- Anti-corruption and judicial reforms:\n - Adopt a comprehensive anti-corruption law free of amendments that compromise its effectiveness.\n - Establish a single agency with adequate powers and independence; consolidate anticorruption work currently performed by several separate agencies.\n - Advance reforms in the judicial system." }, { "heading": "Fiscal policy: Ensuring long-term sustainability", "content": "- Recent fiscal performance:\n - Cash fiscal deficit declined by ¾ percent of GDP in 2015 to 2.9 percent of GDP, driven largely by administrative revenue measures and stronger economic activity.\n - Fiscal overperformance has continued in 2016 due to increases in excise rates, sustained administrative efforts, faster-than-expected growth, and under-execution of EU-funded capital spending.\n - Mission projects revenues for 2016 to overperform the budget target by ¾ percent of GDP on current trends.\n- Policy stance and projections:\n - Mission supports authorities’ plan to save the revenue overperformance to strengthen fiscal buffers against contingent liabilities in the energy, financial, and other sectors.\n - Assuming revenue overperformance is saved and EU funds spending is accelerated, the mission projects the cash deficit to be 0.8 percent of GDP for 2016.\n - Authorities’ medium-term plan: reach fiscal balance by 2020 on an accrual basis through a combination of revenue measures and expenditure restraint.\n - If expenditure savings do not materialize, scope exists to use additional tax measures, such as raising property taxes.\n - Adhering to the medium-term consolidation plan and maintaining a structurally balanced budget thereafter will help reduce government debt gradually to below 25 percent of GDP by 2020.\n - Keeping public debt low is especially important given Bulgaria’s currency board arrangement.\n- Managing contingent liabilities and long-term pressures:\n - Main fiscal threats: poor performance of SOEs, weak finances of subnational governments, concerns regarding the viability of private pension funds (potential shifts to the public pension system).\n - Recommendation: estimate potential negative impact from these risks and incorporate them in fiscal scenarios.\n - Mission welcomes establishment of the Fiscal Council; ensuring its operational independence and enhancing its capacity would help support policy credibility.\n - Long-term demographic pressures:\n - Projected aging and decline in Bulgaria’s population will significantly affect the public pension system and health spending and depress long-term economic growth if unaddressed.\n - 2015 pension reform was important to improve near- and medium-term sustainability of the public pension system.\n - Additional options: introduce parametric pension reforms, contain health spending, improve education to boost labor productivity, and raise high-quality public investment.\n - Review of private pension funds’ assets would help identify needed changes in the private pension system." }, { "heading": "Closing", "content": "- The mission is grateful to the authorities and other counterparts for their warm hospitality and excellent cooperation.\n\nSource: Bulgaria: Staff Concluding Statement of the 2016 Article IV Mission (September 16, 2016), IMF Communications Department.\n\n---\n\n\n References\n\n- Bulgaria and the IMF\n- The IMF and Good Governance -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission" } ], "bullets": [ "[Markdown version](/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission/index.md)", "[Structured JSON version](/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission/index.json)", "[Bundle manifest](/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission/bundle-manifest.json)", "Published: September 16, 2016", "The economy withstood the failure of the fourth largest bank in 2014 and spillovers from the Greek crisis in 2015.", "Current macroeconomic developments are encouraging: output is growing at a steady pace, unemployment is at its lowest level in seven years, and the external current account has remained in surplus.", "The fiscal balance improved significantly in 2015 and the outturn so far points to a considerable overperformance in 2016.", "Government debt, despite a noticeable increase in 2014, is among the lowest in Europe.", "Materially improving economic welfare requires raising potential growth. Bulgaria’s per capita income on a purchasing power parity basis remains less than half of the EU countries’ average.", "Potential output growth has fallen since the global financial crisis, reflecting subdued investment, slower gains in productivity and adverse demographic developments (aging and emigration).", "Key structural reform priorities: mitigate effects of aging and emigration, reduce red tape and corruption, improve performance of state-owned enterprises (SOEs), and protect long-term fiscal sustainability against rising health- and pension-related spending pressures.", "GDP growth forecast: economy is expected to grow 3 percent in 2016.", "Mission’s growth forecast revised up reflecting improved sentiment and rising private consumption.", "Public investment: expected to contract in 2016 as transition to the new EU funds programming period takes hold, but to gather speed in subsequent years.", "Medium-term potential growth: below the average of similar European countries due to unfavorable demographic trends, slow implementation of structural reforms, and modest private investment outlook.", "Risks to the outlook:", "Recent measures and oversight steps:", "AQR and stress test findings and implications:", "Recommended further actions:", "Key reform areas and recommendations:", "Anti-corruption and judicial reforms:", "Recent fiscal performance:", "Policy stance and projections:", "Managing contingent liabilities and long-term pressures:", "The mission is grateful to the authorities and other counterparts for their warm hospitality and excellent cooperation.", "[Bulgaria and the IMF](http://www.imf.org/external/country/BGR/index.htm)", "[The IMF and Good Governance -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2023/the-imf-and-good-governance)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission/index.md", "json": "/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission/index.json", "bundleManifest": "/en/news/articles/2016/09/16/ms091616-bulgaria-staff-concluding-statement-of-the-2016-article-iv-mission/bundle-manifest.json" }, "generatedAtUtc": "2026-09-25T20:10:07.478Z" }