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International Monetary Fund. European Dept.
The economy showed resilience through the pandemic, but the war in Ukraine has clouded the outlook, heightened uncertainty, and increased downside risks. With policy support, growth rebounded in 2021 despite the lingering COVID-19 crisis and protracted political uncertainty that hampered investment. Inflation accelerated significantly, pushed by global factors and strong domestic consumption. GDP growth is projected to slow below 3 percent and average inflation to exceed 12 percent in 2022. In this context, policies must navigate difficult trade-offs as they need to support activity, meet needs from the war, and contain inflation, while raising living standards, reducing inequalities, and supporting the green transition.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Assistance report on Bulgaria reviews the formalization and implementation of a comprehensive Supervisory and Review and Evaluation Process (SREP) that includes an explicit and detailed supervisory Pillar 2 capital requirement. The paper highlights that unsound banking practices or regulatory breaches cannot be compensated by complementary capital charges. Loan loss provisions and capital charges for loans created as a result of such practices cannot be created and judged on the basis of the common standards. Banking Supervision Department has developed a methodology for the combined risk assessment and subsequent definition of an additional capital requirement for credit risk. Individual outcomes of the top-down stress tests carried out by the Macroprudential Supervision and Financial Stability Directorate can make a valuable contribution to the SREP. It allows the assessment of the quality of internal control in the institution and its capacity to timely produce complete and reliable data. While capital positions globally are adequate, and soundness indicators have improved, partly as a result of the 2016 Asset Quality Review, nonperforming loans remain high in Bulgaria, with notable differences between the banks.
International Monetary Fund. European Dept.
This Article IV Consultation highlights that economic performance remains robust but risks to the outlook are tilted to the downside amid slowing external demand. Sound macroeconomic policies notwithstanding, Bulgaria faces a sizable income gap vis-à-vis the EU average and unfavorable demographic prospects. The main policy challenge is to raise growth potential, which calls for broad-based structural reforms to improve public goods provision and institutions. The Article IV discussions focused on medium-term reforms to improve public goods provision and raise potential growth and on near-term policies to enhance financial sector stability. Fiscal policy is broadly appropriate, but the efficiency of spending and revenue administration could be further improved. Stronger public investment management would improve investment efficiency and transparency. Better performance of state-owned enterprises would help raise growth potential and mitigate fiscal risks. Bank profits have risen and non-performing loans (NPLs) have continued to decline, although they are still high among EU countries. The central bank should ensure that banks with high NPLs have adequate capital buffers.
International Monetary Fund. European Dept.
This Selected Issues paper examines corporate productivity growth in Bulgaria using firm-level data. Firms with a higher share of innovative assets and lower financial distress are estimated to have higher productivity growth. Foreign, larger, and younger firms and firms in the tradable sectors also generally had faster productivity growth. The convergence of productivity to frontier firms may have slowed after the global financial crisis for existing firms. The evidence points to technological convergence for both total factor productivity and labor productivity to industry leaders. The result is robust with the coefficient statistically significant at the 1 percent level in all specifications. Policies that support R&D and innovation, improve business environment, and reduce debt service burden could potentially help raise productivity growth. Bulgaria’s R&D spending lags behind other EU countries and there is ample room for improvement. A better business environment supported by stronger institutions could help improve company’s profitability and financial health, raise investment, and attract more foreign direct investment, all conducive to raising productivity growth.