site.btaIMF Projects Bulgaria's Annual Average Inflation at 12.2% in 2022

The Executive Board of the International Monetary Fund (IMF) Friday concluded the Article IV consultation with Bulgaria. The key projections for Bulgaria for 2022 - 12.2% average inflation and 2.8% real GDP growth - were published along with the Executive Board Assessment on the IMF website.

The IMF team, headed by Jean-Francois Dauphin, held consultations and meetings in April for the annual review of the Bulgarian economy, also known as Article IV consultation.

The IMF Executive Board concluded that the Bulgarian economy showed resilience through the pandemic. The economy rebounded in 2021 despite the health crisis and protracted political uncertainty that weighed on investment. GDP surpassed its pre-crisis level by mid last year, and growth reached 4.2 percent in 2021. However, inflation accelerated significantly and reached double-digit in March 2022. 

The Executive Board Assessment says: "The war in Ukraine has clouded the outlook, heightened uncertainty, and increased downside risks. While the economic recovery from the COVID-19 crisis was gaining momentum, the war is dampening growth and accelerating inflation. High energy dependance from Russia is a significant vulnerability. With events unfolding rapidly, uncertainty is high. Key risks include stronger spillovers from the war, including disruptions in energy supply, a resurgence of COVID-19, protracted supply-chain disruptions, and faster-than-anticipated tightening of global financing conditions."

"Fiscal policy needs to be flexible given the large uncertainty. The 2022 budget adopted in February strikes a reasonable balance between supporting the recovery, which is still incomplete and faces strong headwinds from the war, and not fuelling inflation further. The planned mid-year budget revision should be approached flexibly as new needs and priorities may emerge, warranting further reprioritization of spending and, if activity disappoints significantly, possibly also a looser fiscal stance.

"A review of the composition of public spending is needed already this year. The budged reorientation of spending toward more public investment is welcome. However, the magnitude of the planned increase may run against absorption capacity and requires phasing in new projects more gradually," the IMF said. 

The Executive Board Assessment also says that 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, and the reduction in VAT rates should be discontinued.

The IMF concluded that overall, the banking sector remains well capitalized and liquid, and the financial sector has very little direct exposure to Russia or Ukraine. Therefore, systemic risks appear low. However, credit risk may rise because of the impact of surging commodity prices and supply-chain disruptions on corporates, rising interest rates, the lagged impact of withdrawing COVID-19 related support, or an emergence of imbalances in the housing market.

"Accelerating structural reforms is crucial to raise living standards and promote more a competitive, inclusive, and green economy. With the euro area accession in sight, policies that help foster income convergence with EU partners are even more important. The government's focus on strengthening governance and fighting corruption is welcome. Steadfast efforts to improve the effectiveness of the judicial and anticorruption systems are essential to strengthen the rule of law. Ongoing efforts to harness digital technologies and foster innovation are needed to raise productivity. The effective implementation of planned investment in renewables and energy efficiency will strengthen energy security and reduce carbon footprints," the IMF said.