Press Release No. 15/215

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with Bulgaria

May 13, 2015

On May 4, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.¹

Over the last year, Bulgaria’s hard-won macroeconomic and financial stability has been tested by the failure of a large bank and deterioration in the fiscal balance. Nonetheless, modest growth was achieved in 2014 and is expected to continue in 2015, albeit at a lower rate. Consumer prices declined by an average 1.6 percent in 2014, among the sharpest contractions in the EU, but are projected to turn positive late in the year.

The banking system has shown substantial resilience to the damage to confidence resulting from the bank failure. Strong system liquidity and the liquidity support scheme introduced by the BNB and government helped avert system-wide spillovers. However, decisive actions are needed to address weaknesses exposed by the bank failure, restore supervisory credibility, and strengthen crisis management tools. While reported banking system capital buffers remain adequate in aggregate, balance-sheet repair is advancing only slowly.

The fiscal deficit rose to 3.7 percent of GDP, twice the original target. The budget targets a 3 percent of GDP deficit in 2015, and a further 0.5 percentage point reduction per year in coming years. Measures to improve the composition and quality of expenditure and mitigate contingent liabilities arising from state-owned enterprises remain key. At the same time, an aging population and emigration represent significant long-term public spending challenges.

Income convergence with EU counterparts is projected to remain slow with significant age, gender, and regional disparities in income. Decisive action to address long-standing concerns related to corruption remains key. The government has begun to take steps to address the increasingly acute problems arising from inefficiencies in the power sector.

Executive Board Assessment²

Executive Directors noted that Bulgaria has shown resilience to political and financial sector turbulence in the past year, with modest growth and a small reduction in unemployment being achieved notwithstanding strong deflationary pressures. While inflation is projected to turn positive later this year, growth is expected to moderate further in 2015 and remain below levels needed to accelerate income convergence with EU partners. At the same time, risks to the outlook have increased from policy uncertainty and external developments. Directors called for a comprehensive policy response to address risks and restart reform momentum.

Directors urged decisive actions to address important gaps in financial sector oversight and the crisis-management framework in light of the failure of the large domestic bank (KTB). They encouraged prompt implementation of planned reforms to the resolution framework and early recapitalization of the deposit insurance fund. They also welcomed plans to initiate an asset quality review later this year. Directors highlighted the importance of a comprehensive strategy to address the high private sector debt overhang and nonperforming loans to help advance balance sheet repair, reduce asset-price uncertainty, and promote orderly deleveraging. They also underscored the need for ongoing monitoring and contingency planning related to developments in Greece.

Directors welcomed the authorities’ plans to set the budget on a consolidation path following substantial fiscal slippage in 2014. Emphasizing the importance of rebuilding fiscal buffers and restoring policy credibility, particularly under the currency board arrangement, Directors agreed that the authorities should consider more ambitious medium-term consolidation. At the same time, a number of Directors noted the importance—and the challenge—of ensuring that such consolidation does not weaken domestic demand. Containing spending while enhancing its efficiency and prioritizing high-quality public investment, as well as saving revenue over-performance, will be important. Directors also underscored the need for concrete plans to address medium-term fiscal risks stemming from population aging and contingent liabilities from state-owned enterprises (SOEs). They encouraged the authorities to improve the design and sustainability of the pension system and enhance the efficiency of SOEs.

Directors welcomed recent energy sector reforms as important first steps in addressing rising costs and inefficiencies in the sector. They called for broader structural reforms to catalyze investment and productivity gains essential to unlocking Bulgaria’s economic potential, strengthening job creation, and accelerating income convergence. They emphasized the importance of concrete progress in reducing corruption and strengthening the rule of law in renewing confidence in critical institutions. They also pointed to the need to address gaps in health, education, infrastructure, and energy markets.