By Nick Mann | 3 October 2012
Bulgaria is set to make ‘substantial progress’ this year towards its target of reaching a balanced budget by 2015, the International Monetary Fund said today.
The fund’s annual review found the Eastern European country’s fiscal deficit was ‘on track’ to fall to 1.25% of gross domestic product this year, compared with 2.1% in 2011.
Bulgaria should aim to keep the budget deficit at 1.25% in 2013, the IMF said, to ‘preserve the credibility’ of this year’s deficit adjustment, which has made it cheaper for Bulgaria to borrow on the bond markets.
Catriona Purfield, IMF mission chief for Bulgaria, said: ‘Within a tight budget envelope, it will be necessary to resist pressures for generalised wage increases.’ If the country’s fiscal performance exceeded expectations, it should boost its reserves further to build on the impact of a July bond sale that had raised €950m.
‘However, in the event there were to be a severe downturn, the deficit should be allowed to adjust to the economic cycle,’ she added.
The IMF now expects the Bulgarian economy to grow by 1% this year, compared with the 0.8% it forecast after a visit to the country in May. Purfield attributed this improved outlook to stronger domestic demand arising from the use of European Union structural funds. This is expected to improve to 1.5% next year – the same as forecast in May – as exports recover.
‘Strong buffers and steadfast policy implementation have allowed Bulgaria to maintain stability in a challenging environment,’ Purfield said. ‘However, growth remains weak, unemployment is high, and the economy remains exposed to external risks, particularly from the euro area crisis.’
To boost growth, the country should increase capital spending – in particular on infrastructure – by ‘better’ absorbing the funds it receives from the EU. It was also urged to increase incentives to hire younger and less-skilled workers and reform education to improve skills and productivity.
‘Limiting options for early retirement would promote higher labour force participation which, along with health reform, would combat ageing costs,’ Purfield added. ‘Social security contributions under the new single payment system should go directly to pension funds to safeguard their viability.’
