The conclusions of the International Monetary Fund mission, which visited Bulgaria's capital Sofia during the period May 10-20, have exhibited optimism about the Bulgarian economy and state finances.
The visit was part of the IMF's surveillance under Article IV of the IMF's Articles of Agreement. The mission, headed by Catriona Purfield, met with officials from the Ministry of Finance, the Bulgarian National Bank, other government agencies, as well as representatives from the private sector, including banks and industry, unions, and non-government organizations.
The IMF mission was concluded Friday with a meeting with Bulgarian Finance Minister Simeon Djankov and Deputy Governor of the Bulgarian National Bank Kalin Hristov.
"The Bulgarian economy has adjusted swiftly following the recent crisis. The challenge going forward will be to accelerate ongoing reforms to recover growth potential, create jobs, raise incomes, and address age-related pressures, while also maintaining and rebuilding buffers with a view to enhance macroeconomic resilience against shocks," Catriona Purfield, IMF Mission Chief for Bulgaria, said at the end of the visit.
According to the IMF mission head, Bulgaria's exports have rebounded above pre-crisis levels and are expected to propel real GDP growth to 3% in 2011, as growth rebalances towards the export sector.
This is said to be helping offset weaknesses in domestic consumption stemming from increases in inflation and in precautionary savings in the context of heightened external uncertainty. Imports remain subdued and the current account is moving closer to balance. Higher food and fuel prices are projected to increase inflation (harmonized consumer price index) to 4.25% in 2011, before easing to 3% in 2012.
"The structural reforms listed in the National Reform Program will be key to lift growth potential. Already, a good start has been made in implementation. Tailoring training and education to employer needs, while strengthening job search services will help tackle unemployment and raise labor productivity over time. Noticeable progress has recently been made in absorbing EU structural funds. The envisaged amendments to the Public Procurement Law are expected to further accelerate the absorption. More predictable contract enforcement will also help improve Bulgaria's reputation as a good destination for foreign direct investments," according to Purfield.
The IMF has further praised the initiative of the Bulgarian Finance Minister Simeon Djankov to amend the Constitution in order to set limits on budget deficit, i.e. the so called Finance Stability Pact.
"The authorities' proposal of a Financial Stability Pact will send a strong signal of Bulgaria's commitment to prudent fiscal policies, which we endorse. To complement the new framework, a rule that guides expenditures to create savings in upswings should be included in the organic budget law. The government is on track to meet its 2011 budget deficit target," the IMF mission has concluded.
However, it points out that will be important for Bulgaria to sustain on-going efforts to counter tax evasion, while refraining from new or ad-hoc spending increases to permit timely exit from the excessive deficit procedure. Improving public spending efficiency will create space to reallocate funds towards growth-enhancing education and capital investment spending. While reform of the public administration should continue, it will be important to strengthen the efforts to improve healthcare and make it more cost efficient. Preserving the fiscal reserve and rebuilding it would enhance confidence and counter future shocks. Accelerated privatization would be an important contribution to increased fiscal reserves, which should also be supplemented by increased debt issuance.
"The banking system continues to weather the economic crisis well and banks remain well-capitalized. The capital adequacy ratio at end-March was 17.7% (more than twice the EU minimum). As expected, non-performing loans are increasing, albeit at a slower pace, and the trend is projected to reverse in the second half of 2011. We expect lending to begin to recover this year. Credit growth would be facilitated through greater clarity and certainty about the outcome of legal disputes on reposition of collateral, particularly regarding the problem of back dating insolvencies," Purfield said.
The IMF forecast for the Bulgarian economy in 2011 is below the 3.6% growth projected by the Bulgarian government in its 2011 budget.
Just recently, Bulgaria's Finance Ministry reduced its economic growth forecasts for 2012 and 2013 in light of the civil unrest in the Arab world and the aftermath of the devastating earthquake that hit Japan on March 11. Thus, the Cabinet in Sofia now expects Bulgaria's economy grow by 4.1% in 2012 instead of the original figure of 4.7%; in 2013, the growth is forecast to be 4% instead of the 4.9% previously expected.