IMF Executive Board Concludes 2016 Article IV Consultation with Bulgaria

IMF News, November 10, 2016

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Economy expected to grow 3.3 percent in 2016 and around 2.5 percent in the medium term.
Deflation has recently showed signs of gradual easing, supported by decelerating energy price declines and a pick-up in food prices.
Employment and labor market:
- Unemployment at its lowest level in seven years.
- Unemployment rate: 12.4 (2012), 13.0 (2013), 11.5 (2014), 9.2 (2015), 8.2 (2016), 7.1 (2017 proj.).
- Employment: -0.2 (2012), 1.6 (2013), 0.7 (2014–15 data as presented).
Prices and wages:
- Consumer price index (HICP, average): 2.4 (2012), 0.4 (2013), -1.6 (2014), -1.1 (2015), -1.3 (2016), 0.6 (2017 proj.).
- Consumer price index (HICP, end of period): 2.8 (2012), -0.9 (2013), -2.0 (2014), -0.8 (2015), 1.4 (2016).
- Nominal wages: 6.6 (2012), 6.0 (2013), 8.8 (2014), 8.1 (2015), 7.4 (2016).

Cash fiscal deficit projected to decline to around 0.7 percent of GDP—or lower—in 2016, driven by administrative revenue measures, stronger economic activity, and under-execution of EU-funded capital spending.
Main fiscal threats:
- Poor performance of state-owned enterprises (SOEs).
- Weak finances of subnational governments.
- Concerns regarding the viability of Pillar 2 private pension funds.
Long-run fiscal pressure from projected aging and decline in Bulgaria’s population.
General government finances (percent of GDP):
- Revenue: 32.3 (2012), 33.8 (2013), 33.7 (2014), 35.0 (2015), 34.8 (2016), 35.7 (2017).
- Expenditure: 32.8 (2012), 35.5 (2013), 37.3 (2014), 37.8 (2015), 35.6 (2016), 36.8 (2017).
- Balance (net lending/borrowing on cash basis): -0.4 (2012), -1.8 (2013), -3.6 (2014), -2.8 (2015), -0.7 (2016).
- Gross public debt: 16.7 (2012), 17.2 (2013), 26.4 (2014), 25.6 (2015), 28.7 (2016), 25.4 (2017).

Bulgarian National Bank completed an asset quality review (AQR) and stress test in August.
- Results: most banks well-capitalized; three banks (the largest domestically-owned bank and two small ones) needed to restore coverage of capital buffers.
- One bank has raised needed capital; the other two submitted plans to achieve the capital target by mid-2017.
High stock of non-performing loans remains a concern.
A Financial Sector Assessment Program (FSAP) is being undertaken by the IMF and the World Bank; it will provide a more in-depth assessment and is expected to be finalized in the first half of 2017.
Directors welcomed progress strengthening the institutional framework for financial system oversight and encouraged continued reforms, including a more risk-based supervisory review and evaluation process.
Directors welcomed authorities’ readiness to attract new bona fide investors in identified banks and to intervene if banks fail to restore capital buffers within the announced time frame.

Adverse investment, population, and productivity developments have weighed on growth potential since the global financial crisis.
Per capita income (PPP basis) remains less than half of the EU average.
Persistent concerns regarding the rule of law and corruption undermine the business environment.
Many SOEs in infrastructure sectors have become bottlenecks that inhibit growth and productivity.
Directors’ recommendations to raise potential growth:
- Mitigate effects of aging and emigration through active labor market policies and foster conditions for emigrants to return.
- Stimulate private investment by reducing red-tape and corruption.
- Improve competitiveness and governance of state-owned enterprises.
- Develop human capital through education and training.

Selected external and monetary indicators:
- Current account balance: 0.1 (percent of GDP, annual series presented).
- Capital and financial account balance: 2.2.
- o/w: Foreign direct investment balance: -2.5, -3.0, -3.5, -3.1 (series presented).
- International investment position: -78, -73, -75, -60, -54, -50 (series presented).
- o/w: Gross external debt: 90, 88, 92, 76, 78, 72.
- o/w: Gross official reserves: 37, 34, 39, 45, 47, 46.
Broad money (M3) percent change: 8.4 (2012), 8.9 (2013), 1.1 (2014), 5.6 (2015), 4.9 (2016).
Domestic private credit percent change: 0.3 (2012), -7.7 (2013), 1.2 (2014), 6.5 (2015).
Interest rates:
- Interbank rate, 3-month SOFIBOR: 2.3 (2012), 0.8 (2013), 0.5 (2014), …
- Lending rate: 9.7 (2012), 9.1 (2013), 8.3 (2014), 7.5 (2015).
Exchange rate regime:
- Currency board peg to euro at lev 1.95583 per euro.
- Leva per U.S. dollar (end of period): 1.5 (2012), 1.8 (2013).
- Real effective exchange rate (percent change): -0.5 (2012), -3.2 (2013).

Directors noted resilience to shocks, encouraging macroeconomic developments, and moderation of growth in the medium term that will remain below levels needed to accelerate income convergence to the EU average.
Risks to the outlook judged balanced, with emphasis on continued efforts to:
- Safeguard financial stability.
- Raise potential growth.
- Address long-term fiscal costs of aging and emigration.
Directors supported authorities’ fiscal approach to strengthen buffers and praised revenue administration improvements.
Directors look forward to FSAP findings to further inform financial-sector policy.

IMF Press Release No. 16/498, November 10, 2016.