Strong exports, rising consumer confidence and easier financing conditions drove the Bulgarian economy to its fifth consecutive year of growth in 2017. However, income per capita remains low, at half of the European Union average. Reforms in governing and higher efficiency in public institutions will be necessary in order to address the lag. In addition, unfavorable demographic projections would require a new look at the allocation of budgetary revenue. These are some of the recommendations the International Monetary Fund (IMF) made during their last Article IV mission in Bulgaria.
According to IMF, Bulgaria's economic growth will reach 3.8% this year but the rate will gradually fall to close to 2.8% in the coming years. Conversely, the European Commission somewhat surprisingly lowered its own projections for growth by 0.1 percentage point to 3.8% and 3.6% in 2018 and 2019, respectively, compared to its last set of figures in its Autumn Review.
IMF sees a slowdown ahead
While forecasts for a deceleration of economic growth in Bulgaria are nothing new, a drop of one percentage point raises some eyebrows. According to the IMF, ageing population and sluggish investment recovery are the main reasons for the drop-off. Bulgarian government officials do not share the Fund's pessimistic view, though. Authorities are betting on strong private sector investments and productivity growth to drive the rate of expansion above expectations. On the other hand, the IMF finds government forecasts "ambitious".
Short- and long-term challenges
Bulgaria's ambition to accelerate economic growth rate would have to be backed by more efficient public institutions, according to the IMF. For example, inefficient state-owned enterprises continue to suck public resources. A step in the right direction would be to increase transparency with regard to financial conditions in those enterprises.
Aging of the population is another key challenge ahead. Though the issue is common across Europe, the IMF predicts that Bulgaria will lose a quarter of its population in the coming three decades. Addressing the problem would require resources and more specifically - the extra budget revenue today can be used for buffers tomorrow instead of being used for wasteful spending at year-end.
Another important aspect to consider with regard to aging is the productivity of a limited labor force. Here the focus must be on education, the "outdated" curriculum and active labor market policies.
After a full year of constantly improving projections for the Bulgarian economy, the European Commission surprisingly lowered its expectations for growth in the coming years by 0.1 percentage point to 3.8% and 3.6% in 2018 and 2019, respectively. No specific reason for the drop was given in the interim winter forecast, but some speculate that fears of inflation are the reason behind the dip.
The IMF also pointed to rising underlying inflationary pressures, specifically with regard to surging wages and import prices. That being said, it should be noted that core inflation barely reached an annualized rate of 0.5 at year-end, which is one of the lowest numbers in the region.
On the other hand, Brussels bets on stronger absorption of EU funds this year in addition to robust consumer spending, whereas net exports' contribution to growth will remain negative in the next two years.