According to a summary report from the International Monetary Fund (IMF) following a mission to Bulgaria in March, barring any sudden changes in policy or new external shocks that would disrupt the process of containing inflation, Bulgaria's accession to the euro area in the second half of 2025 remains a realistic goal. The mission's report was approved by the IMF Executive Board.
The IMF welcomes the authorities' determination to work towards timely accession to the euro area.
The IMF has adjusted its inflation forecast for Bulgaria for the current fiscal year. In its April report on the global economic outlook, the IMF now expects inflation to be around 3.4% in 2024. In its summary report, inflation is now expected to be 3.2%, 0.2 percentage points lower than its previous forecast.
The IMF Executive Board expressed satisfaction with the resilience of the Bulgarian economy to successive shocks over the past four years. Economic growth is expected to strengthen and deflation to persist, but significant uncertainties and downside risks cloud the outlook.
Bulgaria's economic growth is expected to recover this year due to a recovery in demand from major trading partners, stimulating exports and private investment, while public investment will be supported by EU funds.
The IMF maintained its forecasts for Bulgaria's economic growth this year and next at 2.7% and 2.9%, respectively.
Despite inflationary pressures from sustained wage and pension growth and an expansionary budget for 2024, inflation is expected to continue to ease due to an expected continued decline in global food and energy prices. However, inflation will remain higher than in many European countries, according to an analysis by the Washington-based international financial institution.
Against this backdrop, the IMF Executive Board has stressed the importance of implementing reforms to stimulate the country's potential economic growth, improve income convergence (measures to bring salaries closer to those in other EU and euro area countries), and increase resilience.
The IMF report also noted the EU's slow convergence to middle-income status, low investment, high perceptions of corruption, high inequality, widespread poverty, declining populations, and a growth model that remains heavily dependent on fossil fuel energy.
Given the challenges ahead, fiscal policy faces difficult trade-offs, the IMF said. In the near term, a neutral fiscal stance would strike the right balance between supporting continued deflation and sustaining the expected growth recovery.
Given the uncertain environment, domestic pressures, and fiscal risks, the IMF recommends maintaining prudent fiscal policies over the medium term. IMF experts point to the need for significant investment and social spending and urge the authorities to implement a wide-ranging fiscal reform package.
The package should include measures to sustainably increase tax revenues, achieve a fairer tax system, strengthen public finance and investment management to increase spending efficiency, reduce informality, reform the pension system, and improve the productivity of state-owned enterprises to prevent the accumulation of contingent liabilities.
The IMF Executive Board also noted that systemic risks facing the banking system remain moderate, but urged caution. Given the rapid growth in real estate lending, the authorities' recent steps to increase the countercyclical capital buffer are welcome, and a strengthened macroprudential framework with measures affecting borrowers' creditworthiness is recommended.
