Press Release No. 08/79

Press Release: Statement at the Conclusion of an IMF Mission to Bulgaria

April 9, 2008

An International Monetary Fund (IMF) staff mission led by Albert Jaeger visited Sofia April 3-8 to discuss economic developments and prospects, with a focus on fiscal policy and the financial sector, as part of the regular policy dialogue with the Bulgarian authorities. The following statement was issued at the conclusion of the mission on April 8 by Juan José Fernández Ansola, Resident Representative, in the context of a press conference:

"Economic growth has continued to perform well. As a result, unemployment has dropped sharply, but this also indicates that work force shortages will increasingly constrain growth going forward. Inflation has surged into double digits, mainly propelled by large food and energy price hikes, but also reflecting a tighter labor market, accelerating nominal wage growth has started to feed into higher inflation.

"At the same time, Bulgaria's large current account deficit has continued to widen, mirroring the fact that spending by Bulgaria's private sector by far exceeds its income, with the private sector's shortfall of income compared to spending financed by massive capital inflows.

"Looking ahead, continued global financial market tensions, their adverse knock-on effects on EU and regional growth, and high commodity prices, particularly for oil, are, on balance, likely to weigh on Bulgaria's growth prospects. We still expect growth of 5½ percent in 2008, decelerating to 4¾ percent in 2009. And we see end-period inflation slowing to 7¼ percent in 2008 and 5 percent in 2009.

"Against this backdrop, we expect that Bulgaria's strong policy framework will be sustained and the requirements of the currency board arrangement will continue to be met. Thus, notwithstanding the present large macroeconomic imbalances, in our main scenario both inflation and the current account deficit will gradually normalize to more sustainable levels over the medium term.

"But uncertainty regarding Bulgaria's economic outlook is also unusually large given the unsettled external environment, and, in the context of a possible deterioration of business and consumer confidence, we see risks of a much sharper slowdown.

"Turning to policy requirements, we believe that present settings of fiscal and financial sector policies are appropriately geared to a "soft landing." In particular, the mission believes that the public sector's real wage growth needs to be tied to labor productivity trends. Moreover, fiscal policy in 2008 under a soft landing scenario should continue to broadly maintain the 2007 stance: targeting a fiscal surplus of about 3¾ percent of GDP.

"Should a sharp-slowdown scenario materialize, there is scope for moderating the size of the fiscal surplus if revenues turn out lower than projected. However, safeguarding financial stability would require continued close monitoring of banks' risk management and capacity to absorb adverse shocks. Institutions charged with the functioning of the financial system need to be fully prepared for contingencies, including in the context of recent EU efforts to step up preparedness for cross-border financial spillovers.

"Finally, we agree with the authorities that health and pension reforms are important, but we encourage them to be realistic in the costing of these reforms to ensure fiscal neutrality. In other areas, completing education reform, raising public sector efficiency, activating labor supply, and improving the business climate remain essential for accelerating real convergence."