Bulgaria's economy has been resilient to multiple shocks in recent years and macroeconomic developments have been encouraging, the International Monetary Fund (IMF) said on November 10 after its executive board concluded the 2016 Article IV consultation with Bulgaria. 

However, the IMF executive directors noted that growth is expected to moderate in the medium term and stay below the levels needed to speed up income convergence to the EU average. They agreed that risks to the outlook were balanced, but also called for continued efforts to safeguard financial stability, raise potential growth, and address long-term fiscal costs of aging and emigration.

The Fund expects real GDP growth of 3.3% this year, 2.9% next year and around 2.5% in the medium term. For comparison, the European Commission expects 2016 and 2017 growth of 3.1% and 2.9% respectively.

The IMF said that raising Bulgaria’s potential growth will require structural measures, such as mitigating the effects of aging and emigration through active labour market policies and developing conditions for emigrants to return, stimulating private investment via reducing red-tape and corruption, and improving the competitiveness and governance of state-owned enterprises. The institution’s directors also encouraged more efforts for human capital development through education and training.

The IMF expects average HICP deflation of 1.3% in 2016, to reverse to an inflation of 0.6% in 2017. “Deflation has recently showed signs of gradual easing, supported by decelerating energy price declines and a pick-up in food prices,” the institution said.

The IMF also noted the completion of the asset quality review (AQR) and stress test of the Bulgarian banking system, which it considers a positive step toward boosting confidence. The exercise showed that most banks were well-capitalised but three banks – the largest domestically-owned bank and two small ones – had to restore the coverage of their capital buffers.

One of the small banks has raised the needed capital, and the other two have filed plans to achieve the capital target by mid-2017. “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,” the IMF statement said.

It was also noted that further attention needs to be paid to the high stock of non-performing loans. The IMF and the World Bank have undertaken a financial sector assessment programme that will be finalised in the first half of 2017.

The IMF said that fiscal consolidation is progressing faster than expected, and commended the authorities for their successful efforts in strengthening revenue administration. This year’s fiscal deficit is seen at about or below 0.7% of GDP, reflecting stronger economic activity but under-execution of EU-funded capital spending

The directors supported plans to save the revenue overperformance for 2016 and noted the need to boost fiscal buffers to address unanticipated needs that could arise from contingent liabilities. They also encouraged better utilisation of EU funds and strengthening public investment.

The IMF considers the government’s medium-term plan to achieve fiscal balance appropriate, and emphasised that contingent liabilities, from state-owned enterprises and other sources, should be better estimated and incorporated in fiscal planning. “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,” the statement said.