IMF Executive Board Concludes 2020 Article IV Consultation with Bulgaria

IMF News, February 1, 2021

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Published: February 1, 2021

Macroeconomic impact of COVID-19 and near-term outlook

Real GDP: 3.7 percent growth in 2019; estimated contraction of -4.6 percent in 2020; partial recovery projected at 3.6 percent in 2021.
Pandemic effects: Lockdown at outset of crisis and a second wave with restrictive measures led to a collapse of demand despite fiscal and other support for households and firms.
Labor market: Unemployment rate has risen but recently stabilized, helped by policy support.
Current account: Surplus narrowed to 1.1 percent of GDP in the first three quarters of 2020, with a marked contraction in the net services surplus more than offsetting the improvement in the trade balance.
Credit and banking: Credit growth has slowed; the decline in the nonperforming loans ratio in recent years has paused amid economic contraction. Banks remain generally well-capitalized and liquid.
Fiscal: Fiscal deficit projected to have widened to more than 3 percent of GDP in 2020, up from 1 percent of GDP in 2019, reflecting the fiscal support package and the economic contraction.
Outlook risks: A partial recovery is forecast for 2021, led by private consumption and helped by an accommodative fiscal stance. Uncertainty around the course of the pandemic remains large but risks to the near-term outlook are broadly balanced.

Structural developments and policy context

Euro area integration: Bulgaria joined the European Exchange Rate Mechanism (ERM II) and the banking union in July 2020, bolstering market confidence and advancing toward adopting the euro.
EU support: ERM II membership and the Next Generation EU funds will facilitate further reforms and help address structural challenges.
Social outcomes: Absolute poverty has declined dramatically, while income inequality has risen during the most recent decade.
Medium-term priorities: Promoting stronger and more inclusive income growth requires improving labor market functioning, education, and governance.

Executive Board Assessment — findings

Pandemic shock and recovery: The Bulgarian economy was severely affected by the pandemic but is expected to recover gradually from the sharp contraction.
Policy flexibility: Directors emphasized that policies should remain flexible and evolve with changing circumstances given unusually high uncertainties.
Structural reform importance: Directors highlighted the importance of structural reforms over the medium term to promote strong, inclusive growth and income convergence toward advanced EU partners.
Fiscal response: Directors commended authorities for the fiscal policy response to protect lives and support economic activity and welcomed the 2021 budget for maintaining support and strengthening social benefits.
Financial sector resilience: Financial sector policies helped banks maintain strong balance sheets and keep credit flowing; Directors supported measures allowing banks to absorb asset-quality deterioration and extend credit.

Executive Board Assessment — recommendations

Fiscal policy:
- Remain ready to scale up fiscal support if needed.
- Shift policies gradually toward facilitating resource reallocation over time.
- Move the fiscal stance closer to the medium-term objective once recovery is entrenched, prioritizing efforts to strengthen revenue mobilization and public spending efficiency.
- Further improve the design and targeting of support measures.
- Conduct a comprehensive review of increases in public sector wages and pensions in the future.
European and absorptive capacity:
- Enhance institutional capacity to absorb EU transfers to facilitate transformation to a greener, more digitalized economy.
Financial sector and supervision:
- Be ready to reinforce macroprudential tools.
- Continue encouraging timely recognition of problem loans and resolve high non-performing loans as recovery takes hold, including through effective implementation of the new insolvency framework.
Structural reforms to raise inclusive growth:
- Strengthen active labor market policies and the education system to raise human capital and growth.
- Improve the social protection system and access to education to alleviate inequality and poverty.
- Continue efforts to strengthen governance, fight corruption, and improve the business climate.

Selected economic indicators, 2017–21 (key figures)

Real GDP: 2017: 3.5; 2018: 3.1; 2019: 3.7; 2020: -4.6; 2021 (Proj.): 3.6
Real domestic demand: 2017: 4.5; 2018: 5.8; 2019: 4.6; 2020: -3.3; 2021 (Proj.): 3.3
Public consumption: 2017: 4.3; 2018: 5.4; 2019: 2.0; 2020: 5.6; 2021 (Proj.): 6.1
Private consumption: 2017: 3.8; 2018: 4.4; 2019: 5.5; 2020: -2.0
Gross capital formation: 2017: 7.0; 2018: 10.7; 2019: 4.1; 2020: -14.1; 2021 (Proj.): 0.3
Public investment 1/: 2017: -5.9; 2018: 36.8; 2019: 7.2; 2020: -3.2; 2021 (Proj.): -7.2
Exports of goods and services: 2017: 1.7; 2018: 3.9; 2019: -12.4; 2020: 9.7
Imports of goods and services: 2017: 7.4; 2018: 5.7; 2019: 5.2; 2020: -10.4; 2021 (Proj.): 9.1
Output gap (percent of potential GDP): Potential GDP: -1.5; Output gap: -3.1
Unemployment rate (percent of labor force): 6.2 (2017); 4.2 (2018); 4.8 (2019)
GDP deflator: 4.0 (2017); 5.3 (2018); 2.1 (2019)
Consumer price index (HICP, average): 1.2 (2017); 2.6 (2018); 2.5 (2019); 1.3 (2020)
Consumer price index (HICP, end of period): 1.8 (2017); 2.3 (2018); 0.5 (2019); 1.9 (2020)
General government net lending/borrowing (cash basis, percent of GDP): 0.1 (2017); -1.0 (2018); -3.5 (2019); -4.0 (2020)
General government primary balance (percent of GDP): 1.6 (2017); -0.4 (2018); -2.9 (2019); -3.4 (2020)
Structural overall balance: -2.8
Structural primary balance: -1.7; -2.2
General government gross debt (percent of GDP): 23.0 (2017); 20.1 (2018); 18.4 (2019); 24.0 (2020); 25.8 (2021 proj.)
Broad money: 7.7 (2017); 8.8 (2018); 9.9 (2019); 10.6 (2020)
Domestic private credit: 8.9 (2017); 5.9 (2018)
Current account balance (percent of GDP): 1.0 (2017); 3.0 (2018)
Merchandise trade balance (o/w): -4.8 (2017); -4.7 (2018); -3.6 (2019); -3.9 (2020)
Net international investment position: -43.3 (2017); -37.4 (2018); -31.2 (2019); -29.2 (2020); -23.3 (2021 proj.)

1/ Includes the delivery of fighter planes in 2023 and 2024. The sharp increase in 2023 also reflects disbursements due to EU funding cycle. 2/ Contribution to GDP growth.

Press Release No. 21/28 — IMF Communications Department, February 1, 2021.