IMF Executive Board Concludes 2010 Article IV Consultation with Bulgaria

Public Information Notice (PIN) No. 10/69
June 2, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Bulgaria is also available.

On May 3, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1


In the years that preceded the global economic and financial crisis, large capital inflows into Bulgaria generated a domestic demand boom. This brought strong GDP and employment growth, but also widened the current account deficit to very high levels, and led to an overheating of the economy, with high wage growth and double-digit inflation.

The boom came to an end in the fourth quarter of 2008, amid the global crisis that followed the default of Lehman Brothers. A sharp reduction in capital inflows led to a contraction of domestic demand, while the recession in Bulgaria’s trading partners caused a drop in exports. As a result, GDP contracted by 5.0 percent in 2009.

An increase in exports will lead to a recovery this year, and real GDP is projected to increase by 0.2 percent in 2010. Investment will likely drop further, on the back of an unwinding investment boom, tightened credit, and weak economic activity, while private consumption is forecast to suffer from the decline in employment. Inflation is projected to remain moderate at 2.2 percent, while the current account deficit is expected to drop from 9½ percent in 2009 to 6¼ percent of GDP in 2010.

The downturn has led to a correction of previously built-up flow imbalances, although stock imbalances and vulnerabilities remain high. However, while capital inflows will, over time, recover somewhat from the low levels during the crisis, they will mostly likely remain well below the unsustainable levels experienced before 2009, and both the private sector and public sector will need to adjust to lower capital inflows. The private sector will need to shift resources from the non-tradable to the tradable sector. Public policies will also need to attune to the end of the domestic demand-driven revenue boom and adjust spending growth to the new environment. Sustaining the built-up public buffers is important because private sector vulnerabilities remain considerable. Private sector external debt stood at 102.7 percent of GDP at end-2009, while gross foreign currency debt of the non-financial private sector amounts to 80 percent of GDP.

Executive Board Assessment

Executive Directors commended the Bulgarian authorities for maintaining prudent macroeconomic policies, which had helped steer the economy through the global financial crisis. Directors noted that while the economy is poised to recover this year after a sharp contraction, large private external debt and the potential spillover from regional uncertainties pose considerable downside risks. Capital inflows are likely to remain low and domestic demand is expected to decline further, requiring substantial adjustments by both the private and public sectors. Wage moderation, alongside structural reforms to increase productivity, will help facilitate a reorientation of the economy toward the tradable sector, while containing the growth of public spending is a necessary response to the end of the revenue boom.

Directors underscored the importance of adjusting public policies to help prepare the country for eventual euro area membership. The currency board arrangement has been a pillar of stability, and euro adoption continues to be the most viable exit strategy. Maintaining fiscal discipline and deepening structural policies will not only strengthen economic fundamentals but also demonstrate that Bulgaria can rapidly adjust its economy within the confines of the currency board arrangement.

Directors recognized the challenges facing fiscal policy in 2010, arising from revenue shortfalls and a higher-than-expected stock of payables and arrears. They endorsed the government’s plan to implement a package of measures in order to achieve the revised cash deficit target, notably further cuts in current spending. Directors welcomed the authorities’ readiness to take further steps to preserve fiscal sustainability, including tax measures. The higher-than-expected build-up of arrears in 2009 also highlights the need for timely and adequate fiscal reporting, including on an accrual basis.

For 2011 and beyond, Directors saw a larger role for fiscal policy in stabilizing the economy by focusing, within a medium-term budgetary framework, on the overall spending envelope rather than on headline balances. This would help make public spending more predictable and limit the large intra-year adjustments. They encouraged the authorities to save revenue windfalls, and to compensate any tax rate reductions by further expenditure cuts. On the fiscal reform agenda, high priorities are closing the gap between pension contributions and pension expenditures, and improving the efficiency and quality of the health care system.

Directors welcomed the continued stability of Bulgaria’s financial system, underpinned by prudent regulation and adequate capital buffers. Nevertheless, in light of the rising non-performing loans and the risk of a reversal of parent funding to subsidiaries in Bulgaria, it will be important that the authorities remain vigilant, monitor liquidity closely, and continue close cooperation with parent bank supervisors. Enforcement of a cautious dividend policy and contingency planning are also priorities. Directors welcomed the recent creation of a financial stability unit at the central bank, and looked forward to further improvements to the bank resolution framework.

Bulgaria: Selected Economic Indicators

2009 1/ 2010 2/

Output, prices, and labor market

(Annual percentage change)

Real GDP

6.2 6.3 6.2 6.0 -5.0 0.2

Consumer price index (average)

6.0 7.4 7.6 12.0 2.5 2.2

Consumer price index (end of period)

7.4 6.1 11.6 7.2 1.6 2.7


1.9 4.3 3.5 2.8 -4.0 -2.2

Public Finance

(In percent of GDP)

General government overall balance

2.4 3.5 3.5 3.0 -0.9 -2.5

Gross public debt

31.3 24.6 19.8 16.1 16.1 16.2

Financial net worth

6.0 9.9 10.2 11.5 10.8 8.9

Money and credit

(Annual percentage change)

Broad money (M3)

23.9 26.9 31.2 8.8 4.3 0.3

Credit claims on non-government sector

32.4 24.6 62.5 31.6 3.8 1.6

Balance of payments

(In percent of GDP)

Merchandise trade balance

-20.2 -22.0 -25.1 -25.2 -12.1 -9.9

Current account balance

-12.4 -18.4 -26.8 -24.0 -9.4 -6.2

Gross international reserves

33.7 35.4 41.3 37.3 37.8 37.8

Exchange rates


Exchange rate regime

Currency board arrangement    

Leva per euro

Lev 1.95583 per Euro    

Sources: Bulgarian authorities; and IMF staff estimates.
1/ Preliminary.
2/ Projections.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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