IMF projects 1% GDP growth for Bulgaria to end-2012

Written by on October 3, 2012 in Bulgaria, Business, News - No comments

Bulgaria’s GDP growth is projected at one per cent and unemployment is expected to be 12.5 per cent at the end of 2012, International Mission Chief for Bulgaria, Catriona Purfield, said at the end of an IMF mission visit to Sofia from September 20 to October 2.

GDP growth is expected to rise to 1.5 per cent in 2013 on the strength of recovering exports.

“Strong buffers and steadfast policy implementation have allowed Bulgaria to maintain stability in a challenging environment. However, growth remains weak, unemployment is high, and the economy remains exposed to external risks, particularly from the euro area crisis,” Purfield said.

“We project real GDP growth of one per cent in 2012, due to stronger domestic demand arising from the use of EU structural funds, and rising to 1.5 per cent in 2013 as exports recover. Headline inflation is expected to average 2.5 per cent in 2012, due to higher food and fuel prices.

“The 2012 fiscal cash deficit is on track to fall to 1.25 per cent of GDP, making substantial progress towards the 2015 target of a balanced budget. Targeting an unchanged budget deficit in 2013 would preserve the credibility of this adjustment that resulted in lower yields on government debt. Within a tight budget envelope it will be necessary to resist pressures for generalised wage increases. Any over performance should be used to boost the fiscal reserve given the temporary impact of the July eurobond issue. However, in the event there were to be a severe downturn, the deficit should be allowed to adjust to the economic cycle.

“Boosting growth and employment will require bolder structural reforms. Higher capital spending (e.g., basic infrastructure) funded by better absorption of EU funds would stimulate growth and tackle infrastructure gaps. Alleviating disincentives to the hiring of young and less skilled workers, active labor market policies, and education reform would improve skills and productivity. Limiting options for early retirement would promote higher labour force participation, which along with health reform, would combat aging costs. Social security contributions under the new single payment system should go directly to pension funds to safeguard their viability.

“Predictable enforcement of private contracts is critical to better the business climate. The backdating of insolvencies is raising risks for all lenders, and ultimately causes higher costs for new borrowers. Changing the insolvency law to, among other things, disallow backdating would largely address this problem. Furthermore, introducing a fast track court approval procedure for pre-agreed reorganisation plans and exploring ways to encourage voluntary mechanisms would permit faster and more cost effective debt resolution.

“The banking system is stable, but the low-growth environment is posing challenges. The overall capital adequacy ratio (16.7 per cent in June 2012) exceeds the 12 per cent mandatory requirement. Strong deposit growth and subdued credit demand have boosted liquidity buffers and reduced external funding. Non-performing loans have continued to rise, reaching a gross rate of 16.9 per cent of all loans (June 2012). Banks should be encouraged to actively address non-performing assets by loan restructuring, asset disposals, or write-downs under close monitoring by the Bulgarian National Bank. Strengthening the bank resolution powers should proceed in line with the proposed EU resolution directive,” Purfield said.

 

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