The International Monetary Fund (IMF) has praised the resilience of Bulgaria’s economy and described current macroeconomic developments as “encouraging”, raising its 2016 economic growth target to three per cent.
In its annual review of the country’s economy, known in IMF parlance as an “Article IV consultation”, the Fund said that Bulgaria’s economy withstood well the failure of the country’s fourth largest bank in 2014 and spillovers from the Greek crisis in 2015.
“Output is growing at a steady pace, unemployment is at its lowest level in seven years, and the external current account has remained in surplus. The fiscal balance improved significantly in 2015 and the outturn so far points to a considerable overperformance in 2016,” the IMF mission said in a statement on September 16.
But in the longer term, Bulgaria still faced significant challenges, as potential output growth has fallen since the global financial crisis, reflecting subdued investment, slower gains in productivity and adverse demographic developments. As a result, income convergence with the European Union has been slow and Bulgaria’s per capita income on a purchasing power parity basis remains less than half of the EU countries’ average.
To speed up growth, Bulgaria needed to pursue structural reforms aimed at mitigating the effects of aging and emigration, reducing red tape and corruption, and improving the performance of state-owned enterprises
The higher growth forecast this year was prompted by improved sentiment and rising private consumption, although public investment is expected to contract in 2016, as the transition to the new EU funds programming period takes hold. The main threats to this target included a protracted slowdown in the euro area or instability in Turkey, whereas the direct impact of Brexit was limited, although indirect effects through the impact on the EU and sustained uncertainty could be more significant, the IMF said.
In its review the Fund also highlighted that recent measures have resulted in a healthier financial sector – an area of concern in last year’s review. The leadership of the Bulgarian National Bank (BNB) was addressing the “gaps in banking sector supervision” through a reform plan adopted in October 2015, which included an asset quality review concluded last month.
The IMF mission said that the completion of the banking system’s asset quality review and stress test was “a significant step towards strengthening confidence in the banking sector and the BNB’s ability to supervise it.” The results showed that most of the system remains well-capitalized even after the asset quality review adjustments, although it also found that three banks – the largest domestically-owned bank and two small ones – had to restore the coverage of their capital buffers.
Overall, the ecent reforms to strengthen the institutional framework for financial system oversight were welcome and should continue, the Fund said.
“The central bank should use the information acquired as part of the asset quality review and stress test to pursue a more risk-based supervisory review and evaluation process. Also, adequate resources should be secured to facilitate more inspections. Following the Basel Core Principles assessment, there is a need to tighten the legal framework pertaining to ultimate beneficial owners and related party lending, and for the BNB to announce a comprehensive set of indicators for early intervention in banks,” the IMF said.
(IMF headquarters building at 1900 Pennsylvania Avenue in Washington, DC. Photo: AgnosticPreachersKid/Wikimedia Commons)