## Bulgaria: Staff Concluding Statement of the 2020 Article IV Mission _IMF News, February 14, 2020_ ## Source details **Canonical URL:** [Bulgaria: Staff Concluding Statement of the 2020 Article IV Mission](https://www.imf.org/en/news/articles/2020/02/14/mcs021420-bulgaria-staff-concluding-statement) ## Other formats - [Markdown version](/en/news/articles/2020/02/14/mcs021420-bulgaria-staff-concluding-statement/index.md) - [Structured JSON version](/en/news/articles/2020/02/14/mcs021420-bulgaria-staff-concluding-statement/index.json) - [Bundle manifest](/en/news/articles/2020/02/14/mcs021420-bulgaria-staff-concluding-statement/bundle-manifest.json) ## Bibliographic details - Published: February 14, 2020 --- ### Mission visit and purpose - An International Monetary Fund (IMF) mission, led by Mr. Jaewoo Lee, visited Sofia during February 4-14 to conduct the 2020 Article IV consultation. - Publication date: February 14, 2020. ### Macroeconomic assessment and outlook - Bulgaria’s economic policy challenge: reinvigorate inclusive growth and sustained income convergence. - Recent performance: - Bulgaria’s economy had robust growth in 2019 and unemployment fell to a record low. - The fiscal position is strong. - The external position remains strong, with the current account recording a large surplus. - Fiscal outlook: - The fiscal account is projected to move back from a one-off deficit in 2019 to balance this year and over the medium term. - If downside external risks materialize, automatic fiscal stabilizers should be allowed to play freely and public spending that supports investment could be raised. - Risks and medium-term challenge: - Another robust economic performance is widely expected for 2020, albeit with softer growth and subject to downside external risks. - The distance to high incomes elsewhere in the EU remains large; income inequality is high; demographic headwinds exist. - Achieving more inclusive growth and faster income convergence requires structural reforms to improve governance, loosen labor shortages, strengthen education, and alleviate inequality. ### Improving public services and governance - Fiscal space and objectives: - Bulgaria’s strong fiscal and external positions provide room to increase the level of fiscal spending. - There is scope for greater revenue mobilization to maintain a balanced budget over the medium term, which is an appropriate objective. - Small deficits that serve to support growth-enhancing spending measures would also be appropriate, provided public debt remains around its present low level. - Public investment and EU funds: - Improving public investment management would increase investment efficiency and set the stage for increasing the level of public investment. - The forthcoming nation-wide application of the e-procurement system is welcomed. - Encourage developing standard guidelines for project appraisal and improving multi-year budgeting. - The absorption rate of the EU funds has improved over that of the previous cycle; better planning for future EU funds would reduce backloading and support more efficient investment. - Revenue administration and tax policy: - More effective revenue collection would increase usable resources and improve public sector efficiency and transparency. - Options include reducing the sizable VAT compliance gap and increasing the property tax. - A diagnostic based on the IMF’s framework, Tax Administration and Diagnostic Assessment Tool, could help assess administrative capacity and identify improvements. - Governance and SOEs: - Progress expected in strengthening the judiciary and implementing the framework for state-owned enterprise (SOE) governance. - Government plans to operationalize a post-monitoring council following favorable recognition in the European Commission’s Cooperation and Verification Mechanism. - Legislation on SOE governance has been aligned with the OECD guidelines (a commitment for ERM II); strong implementation should follow, including for ownership policy, financial oversight and board qualification. ### Investing in people - Social protection and inequality: - Bulgaria’s inequality is already high and has been rising; social protection spending (as a share of GDP) and the effectiveness of fiscal redistribution have been falling. - Recommendation: review the level, targeting, and composition of social protection spending, and consider increasing such spending to better cover broader social risks. - Without necessarily revisiting the social contract around the flat income tax, the redistributive role of taxation could be increased, for example, by increasing the maximum insurable income. - Labor market policies: - Endorses ongoing policies to reduce labor shortages (worker importation agreements, efforts to bring back overseas Bulgarians, training programs). - Recommendation: strengthen active labor market policies (ALMPs); spending on ALMPs is low relative to other EU countries. - Suggested ALMP priorities: training, start-up incentives, and private sector employment programs to reduce long-term unemployment (LTU) and improve job matching efficiency. - Education and human capital: - There is room to increase public spending on education, which remains low among EU countries, while ensuring efficiency. - Higher spending could support teaching of digital skills, modernization of the education system, assistance for NEET and early school leavers, promoting equal access to quality education, and raising teacher salaries. - Greater involvement of business could align university curricula with labor market needs; teacher wage hikes should be complemented by measures to attract and retain high-performance teachers. ### Strengthening the financial sector - Supervision and buffers: - The Bulgarian National Bank (BNB) continues a conservative approach to financial supervision with emphasis on capital buffers. - BNB has been raising the countercyclical capital buffer gradually. - More narrowly targeted macro-prudential measures (e.g., borrower-based ones) could be deployed if excessive growth risks emerge in certain credit segments. - Non-performing loans (NPLs) and insolvency: - NPL reduction slowed in 2019 after rapid declines since 2015; the NPL ratio remains well above the EU average. - The mission encourages renewed efforts to reduce NPLs; welcomes BNB’s adoption of the European Banking Authority’s NPL guidelines. - Reforms to improve the insolvency framework (another ERM II commitment) could help reduce NPLs. - Joining the European banking union: - Joining the banking union awaits the satisfactory recapitalization of two banks identified under the ECB’s comprehensive review, a pending requirement. - Upon joining the banking union (as a non-euro area country), significant institutions will fall under direct ECB supervision, as Bulgaria joins both the Single Supervisory Mechanism and Single Resolution Mechanism. - Preparations for ERM II and the banking union have included strengthening the anti-money laundering framework and supervision of the non-bank financial sector. ### Potential gains from successful reforms - Successful reforms could bring appreciable efficiency gains and catalyze higher investment. - Higher, more efficient investment is necessary for sustaining faster growth and convergence and would help moderate Bulgaria’s current account surplus. - More and better spending on government services could also moderate savings and the current account surplus. ### Closing - The mission thanks the authorities and other counterparts for the constructive dialogue and kind hospitality. *Source: Bulgaria: Staff Concluding Statement of the 2020 Article IV Mission (February 14, 2020).* --- ## References - [Bulgaria and the IMF](http://www.imf.org/external/country/BGR/index.htm) - [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance) - [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) _Source: https://www.imf.org/en/news/articles/2020/02/14/mcs021420-bulgaria-staff-concluding-statement_