The International Monetary Fund (IMF) said that it expects Bulgaria's economy to expand by 2.8% in 2022, revising downwards its earlier forecast of 3.2% growth, and noted the need for flexible fiscal policy amid persistent uncertainty from the ongoing war in Ukraine.
Bulgaria's average inflation is projected to exceed 12% in 2022, the IMF said in a statement on Friday in a report of bilateral Article IV discussions supplementing a staff report prepared after the fund's mission to the country in April.
The initial momentum of post-pandemic recovery was sapped by the knock-on effects of the war, which are compounded by Bulgaria's high energy dependence from Russia as a significant vulnerability, the IMF explained in an endorsement of the staff report by its executive board.
The country's energy security will receive a boost from the planned investments in renewable energy sources and energy efficiency, with a price-based mechanism and fiscal tools seen as useful support to green transition incentives when energy prices decline.
While praising greater orientation towards public spending in the budget revision bill, which is yet to be adopted by parliament, the global lender suggested that the composition of public spending already needs reviewing in the current year. Investment projects may will need to be more gradually phased in so as not to challenge absorption capacity given the volume of spending.
"Conversely, the nominal freeze of the wage bill is no longer desirable with inflation running high. The mid-year budget revision should also account for new needs emerging from the war, such as supporting refugees. To help the economy and the population cope with high energy prices, existing subsidies to companies and price caps should be gradually shifted to direct support to vulnerable households," the IMF said.
The proposed measure of reducing VAT tax is "regressive and no longer needed," according to the global lender.
The IMF also noted the need to speed up structural reforms in Bulgaria so as to improve the effectiveness of the judicial and anti-corruption systems as well as raise living standards and ensure incomes move closer to those of EU partners as the country eyes the adoption of the euro from January 2024.
Although Bulgaria's financial sector bears feeble exposure to Russia and Ukraine, surging commodity prices and supply-chain disruptions, the after-effect of discontinuing measures in support of businesses against the pandemic or rising imbalances in the housing market could heighten credit risk so there is a need for authorities to monitor asset quality.
Bulgaria is set to obtain 6.3 billion euro ($6.7 billion) from the EU through its national Recovery and Resilience Plan (RRP). It stands to receive a total of 22 billion levs ($11.9 billion/11.2 billion euro) from the European Union's Cohesion Fund in the 2021-2027 period and a further 2.6 billion levs allocated from the Just Transition Fund.
The resignation on Monday of the coalition government after it lost a no-confidence vote last week has again sparked political instability in the country, with a potential threat to legislation which needs to be adopted to unlock EU funds absorption.