IMF Executive Board Concludes 2011 Article IV Consultation with Bulgaria

Public Information Notice (PIN) No. 11/85
July 8, 2011

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.

On June 29, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1


Bulgaria’s recovery from crisis has been marked by remarkable adjustment. After contracting 5.5 percent in 2009, the economy stabilized in 2010 growing 0.2 percent on the back of strong export growth. Bulgaria’s exports, which benefited from revived global demand and high international commodities prices, recovered to pre-crisis levels. Imports, however, remained subdued in line with depressed domestic demand stemming from high unemployment and economic uncertainty. The accompanying adjustment in external imbalances reduced the current account deficit from 23 to 1 percent of GDP between 2008 and 2010. With considerable slack in the economy, core inflation averaged one percent in 2010, but rising energy and food prices drove average headline inflation to 3 percent.

Strong policy action and large fiscal and financial sector buffers helped Bulgaria weather the crisis well. Past fiscal surpluses saved in the fiscal reserve account boosted international reserves, underpinned confidence in the currency board arrangement, and financed recent deficits (3.9 percent in 2010, cash-basis). This combined with the prompt action to adjust government spending to the decline in revenues contained the fiscal deficit and debt, and created the conditions for a quick exit from EU excessive deficit procedure. In the financial sector, non-performing loans had risen to 12.9 percent by end-March 2011. However, the capital adequacy ratio remained high at 17.7 percent and the banking system was profitable. Bulgaria’s high level of capital and conservative regulatory regime going into the crisis enabled the Bulgarian National Bank to ease its regulatory requirements allowing banks to utilize some of their capital and provisioning buffers to absorb losses.

The recovery is expected to broaden to domestic demand. In 2011, real GDP is projected to rise to 3 percent as continued strong export growth stimulates investment. As unemployment gradually declines, consumption will also gain momentum allowing real GDP to recover its pre-crisis levels in 2012. Pressures from food and energy price increases are expected to ease in the latter half of the year helping contain average HICP inflation to 4¼ percent in 2011. Over the medium term, growth is expected to recover to about 4 percent reflecting the rebalancing between domestic and external demand. Against this backdrop, the current account deficit is expected to be contained to moderate levels.

Executive Board Assessment

Executive Directors commended the authorities for sound policies that helped Bulgaria weather the global crisis and paved the way for the export-led recovery underway. The challenge going forward will be to rebuild policy buffers to address external risks, and to speed up the pace of reforms to boost economic resilience and medium-term growth prospects.

Directors welcomed the authorities’ 2011 deficit target, which implies a timely exit from the EU’s excessive deficit procedure. They noted that strengthening tax compliance and resisting spending pressures in the run up to elections are essential to achieve this target, and were reassured by the authorities’ intention to take additional measures, if necessary.

Directors emphasized that, over the medium term, it will be important to improve the quality and durability of the fiscal consolidation effort. Deeper reforms in health, public administration, and pensions would free policy space, improve service delivery, and address aging-related pressures. Directors supported the proposed Financial Stability Pact, and encouraged the adoption of a complementary fiscal rule that could help avoid policy pro-cyclicality. A few Directors encouraged the authorities to pursue more ambitious medium-term fiscal goals, given the need to reconstitute fiscal buffers.

Directors noted that the banking system remains well-capitalized, liquid, and stable, but recommended continued vigilance to head off potential risks. Directors welcomed the improvement in liquidity indicators at banks, but noted the relatively high level of non-performing loans and, in some cases, the continued reliance on support from parent institutions abroad. In light of the linkages with fiscally distressed euro-area economies, Directors saw merit in further developing contingency plans and back-stop arrangements, and, more broadly, encouraged the authorities to continue to monitor closely the banking system in coordination with home supervisors. In addition, the easing of prudential regulations implemented during the crisis should be reversed and the corporate debt resolution framework should be strengthened.

Directors considered that stepped up structural reforms hold the key to improved growth prospects. Taking note of the staff’s assessment that the exchange rate is broadly in line with medium-term fundamentals, they stressed that wage growth should be better aligned with productivity developments to safeguard competitiveness. Initiatives underway to reduce skills mismatch, decrease administrative burdens, strengthen the legal system, and improve the absorption of EU funds will also be essential to the achievement of a higher growth path.

Bulgaria: Selected Economic and Social Indicators, 2008–12
  2008 2009 2010 2011 2012
      Est. Proj. Proj.

Output, prices, and labor market

(Annual percentage change)

Real GDP

6.2 -5.5 0.2 3.0 3.5

Real domestic demand

6.4 -12.7 -4.5 1.1 3.3

Consumer price index (HICP, average)

12.0 2.5 3.0 4.2 3.1

Consumer price index (HICP, end of period)

7.2 1.6 4.4 3.4 2.8

Unemployment rate 1/

5.7 6.9 10.3 9.7 9.0

Nominal wages 2/

16.5 8.6 6.0 6.0 5.9

General government finances

(In percent of GDP)


38.0 35.3 32.7 32.7 33.5


35.2 36.2 36.7 35.2 35.4

Net lending/borrowing 3/

2.9 -0.9 -3.9 -2.5 -1.9

Privatization proceeds

0.8 0.1 0.1 0.6 0.2

External financing

-1.0 0.9 0.2 0.6 3.0

Domestic financing

-2.7 -0.1 3.7 2.6 0.8

Net lending and other items

-1.1 -0.9 0.1

Gross debt (excluding guarantees) 4/

13.7 14.6 16.2 16.6 19.3

Money and credit

(Annual percentage change)

Broad money (M3)

8.8 4.2 6.4 9.5 8.9

Domestic private credit

31.6 3.8 1.3 5.0 5.5

Interest rates

(In percent)

Euro, 6-month LIBOR

4.6 1.2 0.8 1.7 2.6

Interbank rate, 3-month SOFIBOR

7.1 5.7 4.1

Lending rate

10.9 11.3 11.1

Real lending rate (HICP adjusted)

-1.0 8.6 7.9

Balance of payments

(In percent of GDP)

Current account balance

-23.0 -8.9 -1.0 -0.6 -1.0

Merchandise trade balance

-24.3 -11.9 -6.7 -5.8 -5.9

Capital and financial account balance

33.2 4.8 0.8 2.2 5.1

Foreign direct investment balance

17.5 7.2 4.0 4.0 4.0

International investment position

-97.5 -101.9 -97.6 -91.8 -86.2

Gross official reserves

35.9 37.0 36.0 35.3 37.2

Gross external debt

104.9 108.0 101.8 94.2 90.6

Exchange rates


Leva per euro

Currency board peg to euro at lev 1.95583 per euro

Leva per U.S. dollar (end of period)

1.44 1.34 1.48

Real effective exchange rate


CPI based (percentage change)

8.5 2.1 1.4 2.8 1.5

GDP deflator based (percentage change)

6.4 3.2 1.6 2.7 1.9

Social Indicators (reference year in parentheses)


Per capita GNI (Atlas method, 2009): US $6060; Poverty rate (2008): 21.8 percent;

Life expectancy at birth (2008): 73.3 years; Mortality under 5 (per 1,000) (2009): 10; Fertility rate

per woman (2008): 1.478

Income distribution (Gini index, 2008): 33.5; Primary education completion rate (2008): 89.9


Sources: Bulgarian authorities; IMF staff estimates; World Development Indicators database; and CIA World Factbook

1/ As percent of labor force.

2/ National accounts definition.

3/ On cash basis

4/ General government consolidated gross debt as reported under the ESA95 definition.

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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