Bulgaria’s adoption of the euro is a major milestone and an opportunity to strengthen institutions, enhance policy credibility, and raise medium-term growth, the International Monetary Fund (IMF) said on November 24, reporting on its executive board consultation with Bulgaria.
Following decisions by the relevant European institutions, Bulgaria is to use the euro as its currency as of January 1 2026.
Euro adoption prospects provide a near-term boost to the outlook, the IMF said.
“The transition to the euro is expected to strengthen institutional credibility and investor confidence while reducing currency risk and transaction costs. Some of these benefits are already visible in narrowing sovereign spreads and recent upgrades to Bulgaria’s credit rating,” the Fund said.
It said that economic momentum is strong, the labour market is tight, and inflation is elevated.
High wage growth has driven income convergence, and credit is expanding rapidly, but productivity growth is lagging, the IMF said.
“External demand is subdued, reflecting slower growth in key EU markets and global uncertainty. Still, the external position in 2024 is assessed to be broadly in line with fundamentals and desirable policy settings. Looking ahead, the current account is projected to remain negative in the near term.”
Fiscal tightening in 2026 would help cool the economy, the IMF said.
Fiscal policy is expected to remain expansionary in 2025–26, it said.
“Considering underlying demand strength and the economy’s cyclical position, a neutral stance is recommended, which can be achieved by a combination of expenditure and revenue measures.”
Moderating public wage growth and benefit indexation in particular would generate significant fiscal savings and ease inflationary pressures, the Fund said.
“The substantial recapitalization of SOEs contributes to fiscal easing and underscores the need for greater transparency. More generally, increasing the consistency and transparency of public policies would reduce distortions and strengthen the credibility of fiscal reporting.”
Pension reform should focus on sustainability and adequacy, the IMF said.
The deficit of the pay-as-you-go pension scheme is widening, and population aging will further increase the shortfall.
“Financial sustainability needs to be strengthened by increasing contribution revenues, with a key measure being removing the cap on insurable income, which has not kept up with wage growth. At the same time, improving the adequacy of pensions to reduce old-age poverty remains a priority. Meanwhile, efforts to strengthen the system’s second and third pillars should continue.“
Maintaining fiscal space amid rising spending pressures will require prudent policies and forward-looking reforms, the report said.
“While the overall risk of debt distress remains low, public debt is increasing, owing to sustained deficits and sizeable recapitalizations of SOEs.”
Addressing spending pressures from aging, defence, infrastructure, and the energy transition will also require fiscal space, the IMF said.
“The revenue-generating capacity of the flat-tax regime appears insufficient to meet increasing demands for quality services; in the medium term, more revenue could be raised by increasing tax rates for both personal and corporate income and moving to progressive income taxation.”
Macroprudential policy will need to remain nimble, the IMF said.
The financial sector remains resilient. Still, rapid growth of consumer credit, particularly mortgage loans, has increased systemic risks in the real estate market, it said.
The BNB’s (Bulgarian National Bank) close monitoring of the housing market is therefore welcome.
“Looking ahead, with the drop in reserve requirements following euro adoption, some liquidity may eventually flow into lending and further propel household credit, adding to market pressures.
“Therefore, macroprudential policy, notably through borrower-based measures, will have to proactively manage credit market risks.”
Durably raising living standards will require continued structural reforms, enhanced governance, and strategic investments in human and physical capital, the IMF said.
“Growth dividends from scaling up quality public investment and reducing structural policy gaps could be substantial, particularly through the RRP (the EU’s Recovery and Resilience Plan)”.
Improving governance and institutional quality is essential for long-term growth and building trust, the IMF said.
“Addressing productivity and demographic challenges will require sustained investment in human capital and increased labour market participation.
“Reform is also crucial for the transition to a more resilient, more efficient, and cleaner energy sector, with stronger governance and reduced fiscal vulnerabilities,” the report said.
Source: https://sofiaglobe.com/
