11.04.2022
THE WORLD BANK HAS LOWERED ITS FORECASTS FOR BULGARIA'S ECONOMIC DEVELOPMENT
In a spring report entitled "War in the Region", the World Bank lowered its forecasts for Bulgaria's economic development this year as a result of the negative effects of the war in Ukraine.
The bank already expects the GDP of our country to increase in 2022 by 2.6% compared to the previous forecast in January for economic growth of 3.8 percent.
At the same time, the international financial institution forecasts better growth of 4.3% in 2023, compared to a previous estimate from the beginning of the year for economic expansion of 3.6 percent.
The long-term structural challenges facing Bulgaria include negative demographic trends combined with institutional and managerial weaknesses, the World Bank said. Institutional gaps affect the suboptimal delivery of public services, which hampers private sector expansion and undermines inclusive growth and shared prosperity.
High levels of inequality of opportunity limit access to key public services, limit people's ability to escape poverty and lead to persistently high income inequality. Poverty and inequality are exacerbated by inadequacies in the targeting, coverage and generosity of the social security system, limiting its role as a redistributive mechanism and fiscal stabilizer.
The pace of convergence to the average level of income in the EU is slower than that observed in other new EU members, with Bulgaria continuing to rank last in terms of GDP per capita in Purchasing Power Parity (PPP) in the EU, with 55% of the EU average in 2020.
Economic growth and convergence to average income levels for the EU varies significantly in different regions of Bulgaria - from only 24% of the average EU level in Silistra, to 120% in Sofia in 2019, and this trend is becoming more uneven. As a result, some parts of the country are depopulating rapidly, with the first results of the 2021 census showing the fastest population decline since the 1985 census - by 11.5 percent from 2011 to 6 , 52 million people. The significant emigration from the beginning of the transition period, led by large differences in income and the search for a better quality of life, is the main factor for the rapid loss of population in Bulgaria, according to the World Bank.
According to preliminary data for 2021, GDP growth accelerated to 4.2%, although real production is yet to recover to pre-coronavirus pandemic levels. Final consumption and steady export growth were the main drivers of the recovery. The expansion of exports was preceded by an increase in imports, which led to an increase in the trade deficit and current account deficits.
However, investment continued to decline in 2021, according to the World Bank. The pandemic, coupled with an internal political crisis for most of 2021, has increased investors' reluctance to take risks, while delayed approval of the National Recovery and Sustainability Plan has put additional strain on public investment. Industry, finance and IT have been key sectoral drivers of economic growth.
Like most European countries, Bulgaria has seen a rapid acceleration of inflation since the summer of 2021, reaching 10% on an annual basis in February 2022. Imported inflation due to rising oil prices with its side effects is a key factor behind inflation. From mid-December, regulated prices of electricity, heating and water were frozen until the end of March 2022, which partially mitigated the inflation shock on households.
For its part, businesses have been receiving government subsidies for electricity costs since October 2021, which has kept many companies afloat, despite soaring energy prices. Subsidies on electricity prices are expected to be fiscally neutral, as they will be financed by the profits of the state-owned nuclear power plant, the World Bank said in its spring macroeconomic report.
Despite the growth of fiscal revenues in 2021 (a jump of 18.1% on an annual basis) against the background of stable economic growth and inflation, expenditures are growing at a similar pace (by 17.6%), mainly due to continued support for business and individuals. As a result, the fiscal deficit amounts to 2.9% of GDP.
The banking sector remained stable, with post-tax profits rising 74% to BGN 1.42 billion in 2021 and non-performing loans growing moderately by 1.4 percentage points year on year to 6% by the end of 2021.
Against the backdrop of economic recovery and continued, albeit more targeted, government support, poverty is expected to decline slightly from 6.3% in 2020 to 6.2% in 2021, using the poverty line set by The World Bank, at $ 5.50 a day.
According to the World Bank, the ongoing war in Ukraine provoked a revision of global growth forecasts, as Bulgaria's GDP growth in 2022 was revised down by 1.2 percentage points compared to the January forecast to 2.6 percent.
Risks remain downward (for even weaker growth) and are likely to lead to further downward revisions in the event of a protracted military conflict in Ukraine or new devastating Covid waves amid low levels of vaccination in Bulgaria.
In addition, delays in approving the National Recovery and Sustainability Plan and the EU Funds Operational Programs for the 2021-2027 programming period jeopardize the government's plan to significantly increase public investment in 2022, further undermining growth prospects.
In the medium term, the World Bank expects growth to be fueled by EU-funded public investment and improved sentiment among private investors about the short-term prospect of joining the eurozone.
The acceleration of domestic inflation from the end of 2021 is likely to remain in place at least in the first half of 2022, as energy and food price inflation is exacerbated by the ongoing war in Ukraine. This will lead to further erosion of purchasing power, likely an increase in poverty and higher fiscal spending if current measures to support businesses and individuals are continued beyond the first quarter.
Overall, the draft budget for 2022 suggests that fiscal policy will deviate from the conservative stance of the last two decades. The fiscal deficit is likely to exceed the government's plan by 4.1% of GDP, as the latter is based on a rather optimistic official forecast for economic growth of 4.8%.
A government-sponsored program to accommodate displaced Ukrainian citizens will also be a burden on government spending. More than 58,000 Ukrainian citizens remained in Bulgaria as of March 29th, with about 40,000 of them housed in government-subsidized hotels.
In addition, a budget revision is planned for this summer, which is likely to further increase spending. The World Bank expects the current account balance to return to positive, although remaining below 1% of GDP, in the period 2022-2024.
It is positive that the political crisis that has dominated the Bulgarian national landscape since the beginning of 2021 has been overcome after a four-party coalition took office after the elections on November 14, 2021. There are high expectations from the new government to undertake structural reforms in a number areas, including the judiciary and corruption control, the World Bank added.
