IMF Executive Board Concludes 2016 Article IV Consultation with Bulgaria

The Bulgarian economy has shown resilience since the last Article IV consultation. Growth over the last 4 quarters exceeded expectations. The authorities took concrete steps to correct the fiscal slippage in 2014 and efforts are underway to strengthen confidence in the health of the financial system. Looking ahead, risks to the outlook are broadly balanced. Downside risks stem mostly from weak external demand, possible regional tension, and reversal in domestic policy reforms.

Abstract

The Bulgarian economy has shown resilience since the last Article IV consultation. Growth over the last 4 quarters exceeded expectations. The authorities took concrete steps to correct the fiscal slippage in 2014 and efforts are underway to strengthen confidence in the health of the financial system. Looking ahead, risks to the outlook are broadly balanced. Downside risks stem mostly from weak external demand, possible regional tension, and reversal in domestic policy reforms.

On November 4, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1

The Bulgarian economy has been resilient to multiple shocks in recent years and macroeconomic developments have been encouraging. The economy is expected to grow 3.3 percent this year and around 2.5 percent in the medium term. Deflation has recently showed signs of gradual easing, supported by decelerating energy price declines and a pick-up in food prices.

Fiscal consolidation is advancing faster than anticipated. Driven by administrative revenue measures, stronger economic activity, and under-execution of EU-funded capital spending, the cash fiscal deficit is projected to decline to around 0.7 percent of GDP—or lower—in 2016. Looking ahead, the main threats to the fiscal accounts are posed by poor performance of state-owned enterprises (SOEs), weak finances of subnational governments, and concerns regarding the viability of Pillar 2 private pension funds. Over the long run, the projected aging of, and decline in, Bulgaria’s population will likely lead to significant fiscal pressures.

Gaps in banking supervision and resolution are being addressed. In August, the Bulgarian National Bank completed an assessment of the banking system, consisting of an asset quality review (AQR) and stress test. The results showed that most banks were well-capitalized but three banks—the largest domestically-owned bank and two small ones—had to restore the coverage of their capital buffers. One bank has raised needed capital and the other two have submitted plans to achieve the capital target by mid-2017. A Financial Sector Assessment Program is being undertaken by the IMF and the World Bank and will provide a more in-depth assessment of the financial sector.

Adverse investment, population, and productivity developments have weighed on Bulgaria’s growth potential since the global financial crisis. With slow convergence, the country’s per capita income (on a purchasing power parity basis) remains less than half of the EU average. Persistent concerns regarding the rule of law and corruption add to challenges and undermine the business environment. In addition, many SOEs in infrastructure sectors have become bottlenecks that inhibit growth and productivity.

Executive Board Assessment2

Executive Directors noted that the Bulgarian economy has been resilient to shocks in recent years. Macroeconomic developments have been encouraging with output growing at a steady pace, unemployment at its lowest level in seven years, and deflation showing signs of gradual easing. Directors noted that growth is expected to moderate in the medium term and remain below the levels needed to accelerate income convergence to the EU average. While agreeing that risks to the outlook were balanced, they called for continued efforts to safeguard financial stability, raise potential growth, and address long-term fiscal costs of aging and emigration.

Directors welcomed the completion of the asset quality review (AQR) and stress test, and considered it a positive step toward strengthening confidence in the banking sector and the Bulgarian National Bank’s (BNB) ability to supervise it. While most banks remained well capitalized after the AQR adjustments, a few domestically-owned banks have capital buffer shortfalls which require prompt action. Directors welcomed the authorities’ readiness to attract new bona fide investors in the identified banks and to intervene if these banks are not able to successfully restore capital buffers to the required levels within the announced time frame. At the same time, they noted that the high stock of non-performing loans requires further attention. Directors welcomed recent progress to strengthen the institutional framework for financial system oversight, and encouraged the authorities to continue these reforms and pursue a more risk-based supervisory review and evaluation process. They looked forward to the findings of the FSAP, which is underway and will be finalized in the first half of 2017.

Directors noted that fiscal consolidation is advancing faster than anticipated, and commended the authorities for their successful efforts in strengthening revenue administration. They supported the authorities’ plan to save the revenue overperformance for 2016, noting the need to strengthen fiscal buffers to address unanticipated needs that could arise from contingent liabilities. Directors also encouraged the authorities to better utilize EU funds to strengthen public investment. They considered the authorities’ medium-term plan to attain fiscal balance appropriate, and stressed that contingent liabilities, from state-owned enterprises and other sources, should be better estimated and incorporated in fiscal planning. Over the longer term, there is a need to ensure fiscal sustainability in the face of the projected rise of aging-related spending.

Directors noted that raising Bulgaria’s potential growth will require progress on several structural fronts. Key priorities include mitigating the effects of aging and emigration through active labor market policies and fostering conditions for emigrants to return, stimulating private investment through reducing red-tape and corruption, and improving the competitiveness and governance of state-owned enterprises. Directors also encouraged greater efforts to develop human capital through education and training.

Bulgaria: Selected Economic and Social Indicators, 2012–17

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