IMF Executive Board Concludes 2020 Article IV Consultation with Bulgaria

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded 2020 Article IV consultation [1] with Bulgaria on January 27, 2020.

The COVID-19 pandemic has put a break on Bulgaria’s robust economic performance. Following 3.7 percent growth in 2019, real GDP is estimated to have contracted by 4.6 percent in 2020 as a result of the lockdown at the outset of the crisis and a second wave of infections together with the reintroduction of new restrictive measures. These led to a collapse of demand, notwithstanding fiscal and other support for households and firms. The unemployment rate has risen but recently stabilized, helped by policy support.

The fiscal deficit is projected to have widened to more than 3 percent of GDP in 2020, up from 1 percent of GDP in 2019, on account of the fiscal support package and the economic contraction. The 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 growth has slowed and the decline in the nonperforming loans ratio in recent years has paused on the backdrop of economic contraction. Banks remain generally well-capitalized and liquid.

A partial recovery is forecast for 2021, led by private consumption and helped by an accommodative fiscal stance. Strong growth momentum and a gradual decline in the current account surplus are projected for the next couple of years as consumption and private investment continue to recover. The uncertainty around the course of the pandemic remains large but risks to the near-term outlook are broadly balanced.

During these challenging times, Bulgaria successfully joined the European Exchange Rate Mechanism (ERM II) and the banking union in July 2020, bolstering market confidence and taking another step toward adopting the euro. The ERM II membership and the Next Generation EU funds will facilitate further reforms and help address Bulgaria’s structural challenges. While absolute poverty has declined dramatically, income inequality has risen during the most recent decade. Promoting stronger and more and inclusive income growth will require improving the functioning of the labor market, education, and governance.

Executive Board Assessment [2]

The Bulgarian economy has been severely affected by the pandemic, but is expected to recover gradually from the sharp contraction. Noting that the outlook is subject to unusually high uncertainties, Directors emphasized that policies should remain flexible and evolve with changing circumstances. They highlighted the importance of structural reforms over the medium term to promote strong, inclusive growth and income convergence toward advanced EU partners.

Directors commended the authorities for the fiscal policy response to protect lives and support economic activity. They welcomed the 2021 budget, which maintains support for the economy and strengthens social benefits. Directors encouraged further improvements to the design and targeting of the support measures. They noted that the increases in public sector wages and pension, which have provided a stimulus for the downturn, warrant a comprehensive review in the future.

Directors stressed the need to adjust policies flexibly, including to scale up fiscal support if needed. They recommended shifting policies gradually toward facilitating resource reallocation over time. In this context, enhancing the institutional capacity to absorb EU transfers would be key to the transformation to a greener, more digitalized economy. Directors advised that the fiscal stance should move closer to the medium-term objective once recovery is entrenched, prioritizing efforts to strengthen revenue mobilization and public spending efficiency.

Directors noted that financial sector policies have helped banks maintain strong balance sheets and kept credit flowing. They supported measures to allow banks to absorb the deterioration of asset quality and extend credit, and encouraged the authorities to stand ready to reinforce macroprudential tools. Directors concurred that supervisors should continue encouraging timely recognition of problem loans and make efforts to resolve the high non-performing loans as the recovery takes hold, including through effective implementation of the new insolvency framework. They commended Bulgaria on its entry into the European Exchange Rate Mechanism II and banking union.

Directors emphasized the importance of addressing medium-term challenges through broad-based reforms once the pandemic wanes. They recommended strengthening active labor market policies and the education system to raise human capital and growth. Improving the social protection system and access to education would also help alleviate inequality and poverty. Directors also called for continued efforts to strengthen governance, fight corruption, and improve the business climate more broadly.

Bulgaria: Selected Economic Indicators, 2017-21

2017

2018

2019

2020

2021

Est.

Proj.

Real GDP

3.5

3.1

3.7

-4.6

3.6

Real domestic demand

4.5

5.8

4.6

-3.3

3.3

Public consumption

4.3

5.4

2.0

5.6

6.1

Private consumption

3.8

4.4

5.5

-2.0

3.5

Gross capital formation

7.0

10.7

4.1

-14.1

0.3

Private investment

5.8

-2.3

3.6

-20.5

3.4

Public investment 1/

-5.9

36.8

7.2

-3.2

-7.2

Stock building 2/

0.8

1.1

0.0

0.0

0.0

Net exports 2/

-0.9

-2.6

-0.9

-1.2

0.2

Exports of goods and services

5.8

1.7

3.9

-12.4

9.7

Imports of goods and services

7.4

5.7

5.2

-10.4

9.1

Resource utilization

Potential GDP

3.5

3.1

3.5

-1.5

3.5

Output gap (percent of potential GDP)

0.0

0.0

0.2

-3.1

-3.1

Unemployment rate (percent of labor force)

6.2

5.2

4.2

5.2

4.8

Price

GDP deflator

3.9

4.0

5.3

2.1

2.0

Consumer price index (HICP, average)

1.2

2.6

2.5

1.3

1.2

Consumer price index (HICP, end of period)

1.8

2.3

3.1

0.5

1.9

Fiscal indicators (percent of GDP)

General government net lending/borrowing (cash basis)

0.8

0.1

-1.0

-3.5

-4.0

General government primary balance

1.6

0.8

-0.4

-2.9

-3.4

Structural overall balance

0.8

0.1

0.8

-2.3

-2.8

Structural primary balance

1.6

0.8

1.3

-1.7

-2.2

General government gross debt

23.0

20.1

18.4

24.0

25.8

Monetary aggregates

Broad money

7.7

8.8

9.9

10.6

7.7

Domestic private credit

4.5

8.9

9.7

5.9

8.9

Exchange rates regime

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

1.7

1.7

1.8

Nominal effective rate

1.4

3.3

-0.1

External sector (percent of GDP)

Current account balance

3.5

1.0

3.0

1.2

2.1

o/w: Merchandise trade balance

-1.5

-4.8

-4.7

-3.6

-3.9

Net international investment position

-43.3

-37.4

-31.2

-29.2

-23.3

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

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.


[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. After the visit, the staff prepares a report, which forms the basis for discussion by the Executive Board. The 2020 Article IV mission to Bulgaria has been a virtual visit.

[2] 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 summing up can be found here: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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