IMF: Domestic, Global Turbulence With No Great Market Impact on Bulgaria
An International Monetary Fund (IMF) mission visited Sofia during June 27–July 3, 2013, to discuss economic developments and government policies with the Bulgarian authorities.
At the conclusion of this regular staff visit, Ms. Michele Shannon, IMF Mission Chief for Bulgaria, made the following statement:
“Despite the unsettled political situation, hard-earned macroeconomic and financial stability—which has helped to insulate Bulgaria from the severest effects of the global crisis—has been maintained. Domestic uncertainty and global market turbulence in recent weeks have not had a significant market impact on Bulgaria, with bond yields and credit-default swap spreads remaining in line with other strong performers in Eastern Europe.
“Economic growth is expected to improve only slightly in 2013 from a subdued rate in 2012, and unemployment remains unacceptably high. An uptick in exports and higher absorption of European Union (EU) funds are providing much needed support to the economy, while inflation has declined and is expected to remain low. Risks to the outlook include the uncertainties in the euro area and the domestic political situation.
“The new government’s intention to maintain macroeconomic policy continuity, to increase protection for the most vulnerable in society, and to address key structural rigidities is welcome. A balanced approach—that emphasizes structural reforms as the key drivers of change—will continue to be essential as the government further defines and implements its economic policies. Staff welcomes the efforts to renew the tripartite dialogue in support of inclusive and sustainable solutions to Bulgaria’s economic challenges.
“The reprogramming of 2013 expenditures to support an increase in targeted social protection within the existing budget envelope is welcome. Staff projects that the 2013 budget deficit target is achievable. However, any revenue shortfalls as a result of weaker-than-budgeted economic activity or delays in the reimbursement of EU funds should be accommodated and not offset by compressing expenditure below budgeted amounts. This would avoid pressure on an already fragile recovery. Looking ahead, continued improvements in the composition and efficiency of spending will be required to strengthen the quality of public services and targeting of social services within constrained fiscal space.
“The medium-term path of fiscal adjustment as described in the latest EU Convergence Program is appropriate. The aging population and continued emigration imply significant medium-term public spending challenges. In this context, freezing the process of raising the retirement age and changes in indexation rules would imply deterioration in the sustainability of the pension system unless accompanied by compensating reductions in costs.
“Plans to reduce administrative barriers to business, to increase efficiency in the energy sector and in core public services including health services, and to increase confidence in the legal system and address corruption and cronyism, are essential to support growth and employment. Likewise, plans to reduce structural unemployment, including by addressing skills mismatches and targeting programs for youth workers, are key. The implications of higher minimum wages and minimum social security thresholds on employment should also be considered.
“The financial system remains stable and well capitalized, with high liquidity resulting from constrained credit demand and continued deposit growth. The authorities’ intention to maintain prudent, conservative financial sector policies in the context of changes in the European framework is welcome. Non-performing loans, which at 16.9 percent of total loans on a gross basis have stabilized and are well-provisioned, should continue to be addressed. Regarding the legal framework for debt resolution, the recent limitations on back-dating of insolvency are a step in the right direction.”