IMF Expects Bulgaria To Turn to Small Budget Deficit in 2009, Sees 2.0%/GDP Gap in 2010

“In the current economic climate, balancing the budget will be very challenging. On the revenue side, there are risks that the gains from increased tax compliance may fall short of expectations, while on the expenditure site, the envisaged cuts will require strong spending discipline," IMF mission head Bas Bakker said in a statement posted on the IMF website late on Monday after the end of a ten-day IMF mission in Bulgaria.

"Given these risks, it is well possible that a small fiscal deficit could emerge in 2009, and a deficit of 2 percent of GDP in 2010, and higher deficits are possible if the economy were to contract more than expected,” he added.

Bulgaria recorded a budget surplus of 3.0% of GDP last year. For the first time since 2002, it turned to a consolidated budget deficit of 372.4 million levs ($279 million/190 million euro) at the end of July, compared to a consolidated budget surplus of 4.2 billion levs in the first seven months of 2008.

Shortly after taking office on July 27, the new government of the right-to-centre party GERB, said it targets a balanced budget for this and next year and started to undertake measures aiming at increasing budget revenue and cutting costs, including a 15% spending cut and lay-offs in the state administration staff. The new cabinet also took action to crack down on smuggling of cigarettes, alcohols and fuels.

“During the first seven months of 2009, fiscal policy had not adjusted to the new economic environment. Revenue declined 10 percent from a year earlier, but spending was 24 percent higher. As a result, the 6.3 percent fiscal surplus of the first seven months of 2008 turned into a small deficit (0.6 percent of GDP). Without corrective measures, the 2009 fiscal deficit could have increased to more than 3.5 percent of GDP,” Bekker said in the statement.

The IMF has also revised on Monday to 6.5% its forecast for Bulgaria’s negative economic growth this year from the 7.0% projected earlier and said it expected a 2.5% contraction in 2010.

Bulgaria’s economy shrank by 4.2% in the first half of the year, compared to a 7.1% growth a year earlier. In the second quarter alone the economy contracted by 4.9%, compared to 7.1% growth a year earlier.

“The impact of the global economic and financial crisis on the Bulgarian economy has been significant. Domestic demand has been hit by a sharp drop in capital inflows, which has led to a near-halt of credit growth, while exports have been affected by the recession in Bulgaria’s trading partners. As a result, the economy is now in a recession," Bakker said.

The IMF official added that in the near term fiscal discipline needs to be restored and in the longer term structural reforms are key to steering the economy towards a more sustainable growth pattern.

The IMF mission was invited by Bulgaria's new government to assess the country's fiscal situation. There were no discussions about a possible loan, the fund said in the statement.

(1 euro = 1.95583 Bulgarian levs)