Bulgaria's gross domestic product (GDP) is expected to increase by about 3% this year, while inflation will likely reach double digits, the International Monetary Fund (IMF) said on Friday, adding that the country's economy will be heavily impacted by the war in Ukraine.
"The scale of the impact of the war is difficult to predict. [...] Risks could worsen the outlook through stronger spillovers from the war in Ukraine, resurgence of COVID infections, protracted supply-chain disruptions, and faster-than-anticipated tightening of global financing conditions," the IMF said in a statement.
The economic effects of the war will materialise primarily through higher commodity prices, lower trading partners’ demand, and the impact of uncertainty on investment, while refugees need to be cared for, the IMF also said.
Bulgaria's GDP increased by 4.5% year-on-year in the last quarter of 2021, following a 5% annual increase in the third quarter, according to the most recent data published by the statistical office.
Bulgaria's consumer prices rose by 10% year-on-year in February, following an annual increase of 9.1% in January, the statistical office said last month.
The IMF noted that the country's high energy dependence from Russia is a significant vulnerability. On the other hand, the financial sector has very little direct exposure to Russia or Ukraine, it added.
"Based on our macroeconomic assumptions, the 2022 budget adopted in February would translate into a fiscal deficit of about 3% of GDP on a cash basis, roughly equivalent to last year’s deficit. This policy stance strikes a reasonable balance between supporting the recovery in face of headwinds from the war in Ukraine and not fueling inflation pressures further," IMF's statement read.
According to the IMF, Bulgaria's planned budget revision in the middle of this year will need to be approached flexibly, as new needs and priorities may emerge, and risks may materialise. "These may warrant reprioritisation and, possibly, a looser fiscal stance than currently planned, which the low public debt level would provide the space for," the IMF added.
Fiscal policy needs to continue providing adequate health and economic support, respond to demands arising from the war, and plan for the unknown, while avoiding adding to inflationary pressures, the IMF also noted.
"The banking sector is well capitalised but, in a challenging environment, financial sector policies need to remain vigilant. At the same time, policies need to tackle long-standing structural challenges, especially raising living standards, reducing inequalities, and supporting the green transition," the IMF said.
The IMF also said that with the euro area accession in sight, policies that help foster income convergence with EU partners are even more important. "The resilience and recovery plan, supported by EU funds, has a crucial role to play in these areas. The authorities’ focus on improving governance and fighting corruption is welcome," the IMF added.
Earlier this month, the European Commission approved Bulgaria's 13.5 billion levs ($7.5 billion/6.9 billion euro) plan for economic recovery from the coronavirus pandemic.