KEY ISSUES Context.
Macroeconomic and financial stability has been maintained despite the
difficult environment globally—especially in neighboring Greece—and
recent domestic discord, but growth remains tepid and unemployment high.
Ambitious (and politically challenging) reforms are needed to achieve
Bulgaria’s objective of more rapid income convergence with Europe.
Outlook and risks. Domestic demand is projected to recover gradually
while exports and foreign direct investment are expected to benefit from
recovery in Europe. The domestic social and political situation and
continued uncertainty about the outlook for external partners present
downside risks. Fiscal policy.
The unchanged structural stance under the
2014 budget, which sets the deficit close to national fiscal limits,
strikes an appropriate balance given low projected growth and a strong
underlying fiscal position on the one hand and the importance of
maintaining fiscal credibility (particularly in the context of the
currency board) on the other. The budget is subject to implementation
risk, especially as revenues may fall short of target. The intended
increase in capital spending should be accompanied by appropriate
project selection and monitoring procedures.
Medium-term risks—in
particular related to pensions and state-owned enterprises—will need to
be addressed. Financial sector policies. The financial system remains
well-capitalized and liquid, but profitability is low. Gradual reduction
of nonperforming loans through asset disposal will be important to
reduce asset price uncertainty and support future investment. Structural
policies.
Progress in addressing institutional and broader structural
gaps (including those that contribute to corruption and cronyism) is
needed to set the foundation for stronger growth and job creation.
Previous IMF advice. Policy implementation has generally been consistent
with IMF recommendations.
Prudent fiscal and supervisory policies have
been pursued, allowing macroeconomic and financial stability to be
maintained. However, recent reforms to strengthen the sustainability of
the pension system have been reversed, and the bold structural reforms
needed to accelerate growth require new momentum.
