IMF Finalizes 2024 Article IV Review with Bulgaria

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV consultation[1] with Bulgaria on March 19, 2024.

The Bulgarian economy has shown resilience through a succession of shocks and is achieving a soft landing. Growth slowed in 2023 to 1.8 percent driven by a decline in private investment due to uncertainty and by the unwinding of the inventory buildup of 2021–22. Growth is expected to rebound this year thanks to the recovery in demand from key trading partners, which will spur exports and private investment, while public investment is to be supported by EU funds. Despite sustained wage and pension growth and inflationary pressures from an expansionary 2024 budget, inflation is projected to continue declining owing to the projected continued fall in global food and energy prices, but it has remained higher than in many European peers.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the Bulgarian economy's resilience to successive shocks over the past four years. While the country's economic growth is expected to pick up and disinflation to continue, considerable uncertainty and downside risks cloud the outlook. Against this background, Directors underscored the importance of implementing reforms to boost the country's potential economic growth, improve income convergence, and enhance resilience. They welcomed the authorities' commitment to undertake efforts toward a timely euro area accession.

Considering the challenges ahead, Directors recognized that fiscal policy faces difficult trade-offs. They generally agreed that, in the short term, a neutral fiscal stance would strike the appropriate balance between supporting the ongoing disinflation and preserving the expected rebound in growth. Over the medium term, Directors recommended maintaining a prudent fiscal policy, given the uncertain environment, domestic pressures, and fiscal risks. Noting the large investment and social spending needs, they encouraged the authorities to implement a broad package of fiscal reforms. This package should include measures to permanently increase tax revenue and make the tax system fairer, enhance spending efficiency by strengthening public financial and investment management, reduce informality, reform the pension system, and improve the productivity of state-owned enterprises to prevent the buildup of contingent liabilities. Appropriate sequencing and prioritization will be important to ensure the success and viability of policy measures, and Fund advice can play a helpful role.

Directors noted that the systemic risks faced by the banking system remain moderate but called for vigilance. In view of the rapid rise in real estate lending, they commended the authorities' recent action to increase the countercyclical capital buffer and recommended reinforcing the macroprudential framework with borrower-based measures.

Directors emphasized the importance of addressing medium-term challenges through broad-based structural reforms. They stressed that addressing declining potential growth and slow income convergence requires policies to contain the decline in labor force participation, foster productivity growth, increase domestic and foreign investment, improve competitiveness, and further Bulgaria's integration into global and regional value chains. Along with timely implementation of the authorities' Recovery and Resilience Plan, achieving these goals requires strengthening transparency and governance, addressing corruption, continuing to enhance the AML/CFT framework, investing in infrastructure and human capital, and bolstering the green transition while preserving energy security.

It is expected that the next Article IV consultation with Bulgaria will be held on the standard 12-month cycle.

[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.

[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 summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.