Bulgaria: Staff Closing Announcement of the 2022 Article IV Mission
Bulgaria: Staff Closing Announcement of the 2022 Article IV Mission
April 15, 2022
Authorities have agreed to publish the statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF Executive Board. Based on the preliminary results of this mission, a report will be prepared and submitted to the IMF Executive Board for discussion and decision, subject to staff management approval.
The International Monetary Fund (IMF) Mission, led by Jean-Franకోois Dauphin, visited Sofia from April 5-15, 2022 to hold 2022 Article IV consultations with Bulgaria. At the end of the discussion, the Mission released the following statement:
In an uncertain environment, economic policies face significant challenges. While recovering from the pandemic-induced crisis, war in Ukraine is expected to have a significant economic impact by slowing growth and raising inflation. Monetary policy must continue to provide adequate health and financial assistance, respond to demands arising from war and plan for the unknown, without adding to inflationary pressures. The banking sector is well-capitalized, but in a challenging environment, financial sector policies need to be vigilant. At the same time, policies face long-term structural challenges, particularly raising living standards, reducing inequalities and supporting green transformation. With a view to Eurozone entry, policies that help promote revenue integration with EU partners are even more important. The resilience and recovery plan supported by EU funds play a key role in these areas. Improving governance and focusing the authorities on the fight against corruption is welcome.
The Bulgarian economy is showing resilience through a series of shocks.
Due to policy support, the economy will rebound in 2021 despite the epidemic and long-term political uncertainty that will weigh on investment. GDP surpassed the pre-crisis level by mid-year last year and reached 4.2 per cent growth in 2021, driven by strong financial support in the wake of a strong labor market recovery and strong consumption supported by merry wage growth. However, as in many other countries, inflation has accelerated significantly, rising due to global supply-chain disruptions, rising commodity prices, rising labor costs and strong domestic demand. It reached 8.4 percent in February 2022 and is broadly based.
As the recovery gained momentum, the war in Ukraine suddenly clouded the outlook and significantly increased uncertainty.
. The economic effects of the war are mainly materialized by high commodity prices, low trade demand and uncertainty over investment, but the need for refugee protection. Reliance on high power from Russia is a significant weakness. On the other hand, the financial sector has very little direct exposure to Russia or Ukraine. As events unfold rapidly, it is difficult to estimate the level of impact of the war. While the growth rate is expected to reach around 3 per cent this year, inflation is likely to double. Strong spillovers from the war in Ukraine, recovery from Kovid infections, prolonged supply-chain interruptions and tightening of global financing conditions faster than expected could worsen the outlook for the situation.
Proving financial support without adding inflationary pressures
Economic policy should be flexible as there is large uncertainty, but it is advisable to make some changes already in the mid-year budget review
. Based on our macroeconomic projections, the 2022 budget approved in February will translate into a fiscal deficit of about 3 percent of GDP on a cash basis, almost equal to last year’s deficit. This policy stance has struck a reasonable balance between supporting recovery in the face of headwinds from the war in Ukraine and not fueling further inflationary pressures. As new requirements and priorities may arise and risks may be implemented, the planned mid-year budget revision should simply be approached. These may guarantee redistribution and, perhaps, have a looser financial outlook than currently planned, with a lower public debt level making room for it. Overall, we are already looking at scope to review the composition of the cost in the following ways.
ించడం Diverting the current budget towards more government investment is welcome, but the magnitude of the planned increase from last year may be contrary to absorption capacity. New projects need to be done more gradually in stages.
In contrast, the nominal stagnation in wages included in the current budget is no longer desirable as inflation is high. More broadly, the wage policy should be informed through a comprehensive review of public wages and employment.
· Budget revision should take into account new needs emerging from the war in Ukraine, for example food security and providing critical support to refugees. In addition, in order to plan for unforeseen expenses, the revised budget must also increase its contingency reserves.
Electricity subsidies to companies and temporary retail fuel price caps have helped reduce the impact of higher prices. However, support can be adjusted by gradually changing these existing mechanisms to provide direct support to homes in need. It preserves energy, is affordable, helps reduce financial costs and promotes energy efficiency.
With the re-emergence of labor shortages at this stage of recovery and in some sectors, we support the phasing out of the “60/40” retention plan, which played a key role during the Kovid crisis, but is no longer needed.
Pension augmentation and temporary supplementary pension payments have supported the income of pensioners during the epidemic, but their spending is further burdening the already structurally deficient pension system. A comprehensive review of the pension system will help in formulating reforms that will target both its stability and the appropriate level of pensions.
Expanding economic space to promote higher and more comprehensive growth
Planning for medium-term fiscal consolidation is guaranteed and should be accompanied by revenue and cost-management reforms
. Economic prudence is good in view of the aging and declining population, the currency board setting and the need to preserve buffers in an uncertain external environment. The room to address long-term social and investment needs can be significantly increased by:
Reviewing the tax system to increase revenue and redistribution
. Reform of the low flat personal income tax rate will help create economic space and reduce inequalities. Also, the reduction of VAT rates on selected items introduced as a Kovid-supported measure should be stopped temporarily as it is aimless and regressive.
Increasing the capacity of government spending to improve human capital and promote more inclusive growth.
Improving public investment management and governance will free up resources to finance management, develop infrastructure, increase the absorption of external funds and reduce the risk of corruption. Reviewing the level, objective and composition of social spending can help reduce income inequality and move towards equality of opportunity. Increasing the efficiency of education spending will help it utilize its potential to reduce inequalities, but reforms are also needed to improve the delivery of public health services.
Being vigilant about financial sector risks
Financial sector monitoring should look at the possible increase in credit risk and other spillovers since the war in Ukraine
. During the epidemic, adjustments to financial sector policies supported credit flows and borrower liquidity. The banking sector is highly capitalized, liquid and profitable. Credit for housing through home mortgage lending is now growing rapidly, while credit to corporates has been suppressed. BNB aptly lifted Kovid-related macroprudential measures and announced a gradual increase in counter-cyclic capital buffers. Supervisors should continue to closely monitor the quality of assets and ensure that NPLs are resolved in advance, as banks are likely to increase credit risks due to rising commodity prices on corporates, rising interest rates and the lagging effect on the withdrawal of Kovid-related support. An imbalance is developing in the housing markets.
Accelerating structural reforms
Government focus on improving governance and addressing corruption is imperative and welcome.
True, improving the effectiveness of the judiciary and judicial independence and accountability plays an important role in strengthening the anti-corruption legal framework, raising ethical standards, strengthening the rule of law and promoting more comprehensive growth. Reforms in this area should take steps to improve government investment management and spending efficiency. Continued efforts to strengthen anti-money laundering and counter-financing of the terrorist framework will help reduce the risks of corruption and financial integrity. Furthermore, reforms are welcome to continue the management and oversight of state-owned enterprises with OECD guidelines, in line with the law on public enterprises passed in 2019. To ensure transparency and accountability, ex-post audits of pandemic-related costs should be conducted and relevant beneficial ownership information published.
Efforts to utilize digital technologies and promote innovation can help increase financial efficiency
. Reducing the gaps in digital skills, investing in digital infrastructure and promoting the ecosystem of digital startups are key priorities to enhance the integration of digital technologies and increase productivity in corporate business models. Ongoing reforms in these areas, as well as plans to promote a more innovative economy, including closer ties between academia and institutions, are welcome.
Energy policy should balance near and medium term needs
. Despite recent progress, climate relief for Bulgaria remains an important policy agenda, as greenhouse gas emissions are higher than other EU countries in terms of size. After the war in Ukraine, ensuring energy security through alternative supplies became an immediate priority to reduce the economic downturn. Bulgaria’s decarbonization strategy aims to gradually reduce the role of coal, increase the use of renewable energy sources and improve the energy efficiency of the building and transport sectors. Investment plans in renewable and energy efficiency should be welcomed and accelerated as much as possible, as they will simultaneously help improve energy security and reduce greenhouse gas emissions. In the wake of declining energy prices, it is important to maintain incentives for energy conservation, investments in renewable materials and a reduction in the role of coal through a price-based mechanism and financial instruments.
<div class="imf-com"> <h5>IMF Communications Division</h5>
Press Officer: Mila Cherneva
Phone: +1 202 623-7100Email: [email protected]