## IMF Executive Board Concludes 2016 Article IV Consultation with Bulgaria

_IMF News, November 10, 2016_

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## Bibliographic details
- Published: November 10, 2016

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### Macroeconomic outlook and recent developments
- 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).

### Fiscal developments and risks
- 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).

- Directors’ fiscal guidance and observations:
  - Commended authorities for strengthening revenue administration.
  - Supported plan to save 2016 revenue overperformance to build fiscal buffers.
  - Encouraged better utilization of EU funds to strengthen public investment.
  - Advised better estimation and incorporation of contingent liabilities (including from SOEs) into fiscal planning.
  - Noted need to ensure fiscal sustainability given aging-related spending.

### Financial sector assessment and supervision
- 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.

### Structural challenges and growth determinants
- 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.

### Balance of payments, external position, and monetary indicators
- 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).

### Social indicators (reference years as presented)
- Per capita GNI (2015): US$ 7,220.
- Income distribution (Gini index, 2012): 36.0.
- Poverty rate (2013): 21.8.
- Primary education completion rate (2013): 98.0.
- Births per woman (2013): 1.5.
- Mortality under 5 (per 1,000) (2013): 11.5.
- Life expectancy at birth (2013): 74.9 yrs.

### Executive Board assessment — key messages
- 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.*

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## References

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