IMF urges Bulgaria to implement fiscal, structural reforms

Although the country's economy has demonstrated resilience, fiscal policy should balance support for disinflation and recovery, the IMF said in a statement on Tuesday, following its Article IV Mission to Sofia.

Last year, Bulgaria's economy expanded by 1.8% compared to 3.9% in 2022, according to preliminary data from the statistical office. In 2024, gross domestic product (GDP) growth is expected to reach about 2.75%, driven by a stabilised inventory cycle and increased public investment. At the same time, a continued decline in global commodity prices is projected to support disinflation.

However, the country's expansionary budget for 2024 could add to inflationary pressure. Reducing the planned deficit for this year by about 1% of GDP would establish a broadly neutral fiscal stance, protecting the expected rebound in growth and supporting the disinflationary process.

The deficit adjustment should focus on measures to generate sustainable revenue, including reinstating pre-pandemic VAT tax rates, targeting subsidies, removing social contribution caps and increasing personal income taxation, the IMF noted.

Fiscal reforms are needed to sustainably increase social spending, invest in infrastructure and human capital and enhance governance. Among the priorities are improving public investment management and governance, overhauling the pension and tax systems, widening tax bases and preventing the accumulation of contingent liabilities from state-owned enterprises.

"Looking ahead, and with the euro adoption in sight, policies need to tackle longstanding, intertwined challenges: poverty and inequality are significant and convergence toward EU average income is lagging peers while low investment and productivity and a shrinking population constrain economic growth," the IMF said.

To address these issues, Bulgaria must accelerate structural reforms, strengthening its governance and combatting corruption while investing in infrastructure and human capital. The IMF also recommends policies promoting energy savings, investment in renewables and reducing coal use amidst declining energy prices.

Finally, despite a well-capitalised, profitable and liquid banking sector, rapid credit growth requires caution. Strengthening the macroprudential framework with borrower-based measures would help maintain asset quality ahead of a potential increase in lending market competition due to increased liquidity following the euro adoption, the IMF added.