IMF Executive Board Concludes 2012 Article IV Consultation with Bulgaria

Public Information Notice (PIN) No. 12/140
December 13, 2012

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 2012 Article IV Consultation with Bulgaria is also available.

On November 30, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1


Growth has been lackluster since the crisis leaving unemployment high and output below its pre-crisis levels. Real GDP growth in the first half of 2012 was positive, but low—at 0.9 percent. Domestic demand gained some traction on improved EU funds absorption and consumption, but the slowdown in external demand led to a negative external sector contribution. With little change foreseen for the second half of 2012, real GDP growth is expected to grow by 1 percent in 2012 and gain pace in 2013 provided external conditions improve. The current account, which registered a small surplus of 0.3 percent of GDP in 2011, has moved into deficit as imports outpace exports. Headline inflation is expected to average 2½ percent in 2012 due to higher food and fuel prices. The unemployment rate has continued to rise reaching 11.5 percent in September and, absent strong growth, will stay in this range.

Strong buffers and steadfast policy implementation have allowed Bulgaria to maintain stability in a challenging environment. The fiscal deficit has continued to decline and is on

track to fall below the budget target of 1.5 percent of GDP; public debt is the second lowest in the EU. The fiscal adjustment, which amounted to a cumulative structural improvement in 2011-12 of 2 percent of GDP, was largely expenditure-based. In the financial sector, the difficult economic environment has worsened profitability and asset quality (non-performing loans reached 16.9 percent of loans in mid 2012). However, reflecting prudent supervisory policies, the overall capital adequacy ratio (16.7 percent in June) comfortably exceeds the already large 12 percent regulatory minimum with additional cushions available in the form of specific provisions.

Some progress has been made in tackling structural bottlenecks to growth but more needs to be done to boost productivity, raise growth prospects, and create jobs. Reforms of the public administration and public pension system have contributed to more sustainable public finances over the long term. Streamlining of administrative processes and the new public procurement law facilitated a marked step-up in EU funds absorption, particularly for infrastructure. These reforms combined with a stable macro environment improved Bulgaria’s ranking on some international competitiveness scoreboards. Still unemployment, particularly among the young and less skilled, remains very high, labor productivity has lagged real wage growth since the crisis, and firms are reluctant to hire given the unpredictable business environment and high debt burden.

Executive Board Assessment

Executive Directors commended the authorities’ prudent policy implementation, which has ensured macroeconomic and financial stability in a difficult external environment. Nevertheless, Directors noted that this subdued external environment is limiting near–term economic growth and that unemployment remains high, especially among the young and low–skilled. Further, rollover risks related to private external debt and rising nonperforming bank loans present vulnerabilities, while aging pressures and the income gap with other European Union members pose longer-term challenges. Accordingly, Directors emphasized that this uncertain environment calls for maintaining prudent policies and buffers, and that bolder structural reforms will be needed to revive growth.

Directors broadly agreed that the currency board arrangement has served Bulgaria well. They welcomed the fiscal adjustment that has been achieved, with the budget currently close to structural balance, and encouraged the authorities to preserve this achievement in the forthcoming election year. Directors viewed the 2015 target of budget balance as appropriate, and agreed that it provides space for automatic stabilizers to work in the event of a shock. They considered that rebuilding the fiscal reserve through saving fiscal over-performance or privatization receipts would strengthen Bulgaria’s defenses, and recommended a review to appropriately tailor its structure and funding.

Directors observed that the financial system is stable with high buffers but that the low growth environment poses challenges. They emphasized the need for continued vigilance and sustained efforts to ensure sufficient capital and liquidity buffers in the weaker pockets of the system. Directors underlined that banks should actively address non-performing loans to support the recovery, and encouraged the authorities to continue to press for conservative provisioning and improve in- and out-of-court procedures. Further, the authorities’ resolution powers and toolkit should be expanded.

Directors considered that improving the composition of the budget, through increased spending on infrastructure investment and active labor market policies, would support growth. To preserve budget targets, this should be financed via EU funds absorption, better tax compliance, and reductions in subsidies. The absorption of EU funds is key, due to their size, the large grant element, and the potential impact on growth and employment. Directors also encouraged the improvement of the insolvency framework to support the business environment, in particular by eliminating backdating of insolvencies. Ensuring the proper functioning of the labor market, notably at the lower end, would help reduce differences in unemployment and income, as would more targeted education and training. Finally, Directors welcomed the upcoming review of social insurance thresholds and minimum wages to encourage job creation, and underscored that future wage increases should be anchored in productivity gains.

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

Output, prices, and labor market (percent change, unless otherwise indicated)

Real GDP

6.2 -5.5 0.4 1.7 1.0

Real domestic demand

6.4 -12.8 -5.1 -0.3 2.8

Consumer price index (HICP, average)

12.0 2.5 3.0 3.4 2.6

Consumer price index (HICP, end of period)

7.2 1.6 4.4 2.0 3.5

Unemployment rate (percent of labor force)

5.7 6.9 10.3 11.3 12.4

Nominal wages (national accounts definition)

16.3 9.4 11.2 7.3 5.5

General government finances (percent of GDP)


38.0 35.3 32.7 32.5 34.4


35.2 36.2 36.6 34.4 35.7

Balance (net lending/borrowing on cash basis)

2.9 -0.9 -3.9 -2.0 -1.3

External financing 1/

-1.0 0.9 0.2 0.2 3.4

Domestic financing (incl. fiscal reserve)

-1.9 0.0 3.7 1.8 -2.2

Gross public debt

13.7 13.8 14.9 15.5 18.5

Financial net worth

11.1 6.6 4.0 2.2 2.1

Money and credit (percent change)

Broad money (M3)

8.8 4.2 6.4 12.3 7.5

Domestic private credit

31.6 3.8 1.3 3.8 4.1

Interest rates (percent)

Interbank rate, 3-month SOFIBOR

7.1 5.7 4.1 3.8

Lending rate

10.9 11.3 11.1 10.6

Balance of payments (percent of GDP, unless otherwise indicated)

Current account balance

-23.0 -8.9 -1.5 0.3 -1.6

Capital and financial account balance

33.2 4.8 -1.1 -0.8 6.2

o/w: Foreign direct investment balance

17.5 7.2 2.7 4.1 4.0

International investment position

-98 -102 -95 -86 -84

o/w: Gross external debt

105 108 103 92 94

o/w: Gross official reserves

36 37 36 35 38

Exchange rates

Currency board peg to euro at lev 1.95583 per euro

Leva per euro


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

1.44 1.34 1.48 1.45

Real effective exchange rate (percent change)


CPI based

9.3 4.4 -3.9 2.7 0.7

GDP deflator based

6.4 3.2 1.9 3.8 0.4

Social indicators (reference year in parentheses):


Per capita GNI (2011): US$ 6,550; income distribution (Gini index, 2007): 28.2; poverty rate (2007): 10.6 percent.

Primary education completion rate (2009): 95.5.


Births per woman (2010): 1.5; mortality under 5 (per 1,000) (2011): 12.1; life expectancy at birth (2010): 73.5 years.


Sources: Bulgarian authorities; World Development Indicators; and IMF staff estimates.

1/ Reflects €950 million Eurobond issued in 2012 and another assumed in 2014.

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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