Journal Issue

IMF Executive Board Concludes the 2017 Article IV Consultation with Bulgaria

International Monetary Fund. European Dept.
Published Date:
February 2018
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On February 14, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Bulgaria.

The Bulgarian economy is performing well. Growth has been on an upward trend and is estimated to reach 3.8 percent in 2017 and 2018, driven by strong exports, easier financial conditions, and growing confidence. The current account remained in surplus in 2017, despite rapid wage growth. The economy shows signs of a closing output gap. Headline inflation turned positive in 2017 and inflationary pressure is rising. The unemployment rate has declined to 5.8 percent, the lowest level since the global financial crisis. Fiscal outcomes have been stronger than budgeted in recent years – a surplus of 0.8 percent of GDP is estimated for 2017 – reflecting mainly revenue overperformance and under-execution of capital spending.

The main challenge is to translate this recent recovery into sustained and inclusive growth and convergence with other EU countries. Bulgaria’s per capita income is only half of the EU average and income inequality is higher than EU average. Growth is projected to moderate to 2¾ percent over the medium, reflecting capacity constraints and unfavorable demographics. Public debt is low, but contingent liabilities and long-term fiscal pressures from demographic challenges could pose fiscal risks over the long run.

Advancing governance reform and improving efficiency of public institutions at all levels remain key to raise potential growth and contain fiscal risks. Reform priorities include improving public infrastructure, enhancing quality of and access to education and healthcare, addressing skill mismatches in the labor market, and strengthening management and oversight of state-owned enterprises. The banking system is resilient, but NPLs remain well above the EU average and two of the banks identified by the asset quality review and stress test still require larger capital buffers.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Bulgaria’s strong macroeconomic performance and commended the authorities for their prudent policy management. Directors noted that despite the significant progress, challenges remain. They encouraged the authorities to use the current supportive economic environment to focus on improving public goods provision, addressing the fiscal challenges posed by unfavorable demographic prospects, and strengthening governance and labor markets to accelerate income convergence to EU levels.

Directors welcomed the current fiscal policy stance and considered the authorities’ budget deficit target for 2018 to be appropriate, given the need for more public investment. They also endorsed the plan to balance the budget over the medium term. Directors generally agreed that saving revenue overperformance would help avoid adding excessive fiscal stimulus and build fiscal buffers. A number of Directors emphasized that fiscal consolidation should be growth friendly and uphold the much-needed capital as well as social spending. Directors underscored the importance of enhancing spending efficiency and effectiveness, including for EU funds. They noted the need for continued attention to fiscal challenges related to population aging.

Directors commended the efforts to strengthen financial supervision. They welcomed the implementation of the FSAP recommendations and the work underway to operationalize the new crisis management arrangements. They welcomed the improved governance structure at the Bulgarian National Bank and encouraged effective implementation. Directors encouraged the authorities to complete other ongoing work, including addressing concentration and related party risks and introducing a comprehensive strategy for NPL reduction. Progress on these fronts will further strengthen financial stability and support better governance. Credible new investment should be finalized promptly for two banks which have been identified as needing larger capital buffers, while meeting the regulatory capital requirement.

Directors emphasized that structural reforms aimed at improving the quality of education and health, enhancing oversight and performance of state-owned enterprises, and strengthening governance are critical to boost productivity and competitiveness, and promote sustained inclusive growth. In this regard, they agreed that more equitable access to education and better targeting of active labor market policies will be important. Directors welcomed recent reforms to improve the judiciary and the fight against corruption, and highlighted that further efforts in this area will create an environment more conducive to private investment.

Bulgaria: Selected Economic and Social Indicators, 2013–18
Output, prices, and labor market (percent change, unless otherwise indicated)
Real GDP0.
Real domestic demand-
Consumer price index (HICP, average)0.4-1.6-1.1-
Consumer price index (HICP, end of period)-0.9-2.0-0.9-
Unemployment rate (percent of labor force)
Nominal wages6.
General government finances (percent of GDP)
Balance (net lending/borrowing on cash basis)-1.8-3.6-
External financing-
Domestic financing2.6-1.5-1.1-
Gross public debt17.226.425.627.423.923.5
Money and credit (percent change)
Broad money (M3)
Domestic private credit0.3-7.7-
Interest rates (percent)
Interbank rate, 3-month SOFIBOR1.
Lending rate (loans to households)
Balance of payments (percent of GDP, unless otherwise indicated)
Current account balance1.
Capital account balance1.
Financial account balance3.4-4.9-
o/w: Foreign direct investment balance-3.0-2.1-5.1-0.7-0.6-0.7
International investment position-73-75-61-47-43-36
o/w: Gross external debt889274716361
o/w: Gross official reserves343945504747
Exchange rates
Leva per euroCurrency board peg to euro at lev 1.95583 per euro
Leva per U.S. dollar (end of period)
Real effective exchange rate (percent change)1.3-0.5-
Social indicators (reference year in parentheses):
Per capita GNI (2016): US$ 7,580; income distribution (Gini index, 2014): 37.4; poverty rate (2014): 22.0 percent.
Primary education completion rate (2015): 98.1 percent.
Births per woman (2015): 1.5; mortality under 5 (per 1,000) (2016): 7.6; life expectancy at birth (2015): 74.5 years.
Sources: Bulgarian authorities; World Development Indicators, The World Bank; and IMF staff estimates.
Sources: Bulgarian authorities; World Development Indicators, The World Bank; and IMF staff estimates.

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 summing up can be found here:

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