Bulgaria: Staff Report for the 2013 Article IV Consultation

KEY ISSUESContext. Macroeconomic and financial stability has been maintained despite the difficultenvironment globally—especially in neighboring Greece—and recent domestic discord,but growth remains tepid and unemployment high. Ambitious (and politicallychallenging) reforms are needed to achieve Bulgaria's objective of more rapid incomeconvergence with Europe.Outlook and risks. Domestic demand is projected to recover gradually while exportsand foreign direct investment are expected to benefit from recovery in Europe. Thedomestic social and political situation and continued uncertainty about the outlook forexternal partners present downside risks.Fiscal policy. The unchanged structural stance under the 2014 budget, which sets thedeficit close to national fiscal limits, strikes an appropriate balance given low projectedgrowth and a strong underlying fiscal position on the one hand and the importance ofmaintaining fiscal credibility (particularly in the context of the currency board) on theother. The budget is subject to implementation risk, especially as revenues may fall shortof target. The intended increase in capital spending should be accompanied byappropriate project selection and monitoring procedures. Medium-term risks—inparticular related to pensions and state-owned enterprises—will need to be addressed.Financial sector policies. The financial system remains well-capitalized and liquid, butprofitability is low. Gradual reduction of nonperforming loans through asset disposal willbe 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 thefoundation for stronger growth and job creation.Previous IMF advice. Policy implementation has generally been consistent with IMFrecommendations. Prudent fiscal and supervisory policies have been pursued, allowingmacroeconomic and financial stability to be maintained. However, recent reforms tostrengthen the sustainability of the pension system have been reversed, and the boldstructural reforms needed to accelerate growth require new momentum.