19.04.2022

COMPLETES IMF MISSION IN BULGARIA - DOUBLE-DIGIT INFLATION FORECAST

The team of the International Monetary Fund, which conducted its regular mission in Bulgaria in the period April 5-15, forecasts growth of nearly 3 percent this year and double-digit values ​​of inflation in Bulgaria. The budget for 2022, adopted in February, will lead to a fiscal deficit of about 3 percent of GDP on a cash basis, which is similar to last year's deficit, the forecast said. Given the uncertain environment, economic policy faces serious challenges. Although the recovery from the pandemic crisis has been lasting, the war in Ukraine is expected to have a serious economic impact, including by slowing growth and accelerating inflation, said team leader Jean-François Dauphan at a closing press conference at the Intercontinental Hotel Sofia.

The preliminary conclusions of the experts who conducted the so-called consultations under Article IV of the IMF Memorandum of Association were presented there.

Other economic risks identified included a resurgence of Kovid-19 morbidity, prolonged supply chain disruptions and faster-than-expected tightening of global financial conditions.

According to experts, fiscal policy must continue to provide adequate health and economic support, address the needs arising from the war, and take into account the uncertainty, while striving to avoid pro-inflationary pressures. The banking sector is well-capitalized, but given the unfavorable environment, financial policy must remain vigilant, the IMF mission recommends.

At the same time, policies need to address long-standing structural challenges, especially with regard to raising living standards, reducing inequalities and supporting the green transition. Dauphan emphasized that the Recovery and Sustainability Plan, backed by European funds, has a crucial role to play. We support the focus of the authorities' efforts on improving governance and the fight against corruption, the IMF team said.

According to experts, the Bulgarian economy has shown resilience, going through a series of shocks. However, the war in Ukraine has suddenly darkened prospects and significantly increased uncertainty. The economic consequences of the war will materialize mainly through higher commodity prices, lower demand from trading partners and the impact of uncertainty on investment, while at the same time supporting refugees. High energy dependence on Russia is a serious vulnerability. On the other hand, the financial sector has very little direct exposure to Russia or Ukraine. Given the rapid development of events, it is difficult to predict the scale of the impact of the war, according to the Fund.

From there, they recommended changes that could be adopted with the mid-year review of the budget.

Based on our macroeconomic assumptions, the budget for 2022, adopted in February, will lead to a fiscal deficit of about 3 percent of GDP on a cash basis, which is similar to last year's deficit. This policy strikes a good balance between support for recovery, given the negative impact of the war in Ukraine, and the desire not to fuel inflation. It will be necessary to take a flexible approach in the planned mid-year budget revision, as new needs and priorities may emerge and risks may materialize. This may require a change in priorities and a possible loosening of the fiscal position to a greater extent than currently planned, which will allow the low level of public debt, Dauphan said.

The IMF mission supports the reorientation of the current budget towards more public investment, but warned that the launch of new projects may need to be phased in. In addition, according to experts, wage policy should be based on a comprehensive overview of wages and employment in the public sector.

The budget update must take into account the new needs arising from the war in Ukraine, for example in terms of food security and the provision of crucial support for refugees. In addition, in order to take account of possible contingencies, the updated budget will also need to increase the contingency reserve.

At this stage of the recovery, and given the recurrence of labor shortages in some sectors, IMF experts support the phasing out of the 60/40 retention scheme, "which played a key role during the covid crisis, but it no longer seems necessary."

A comprehensive review of the pension system would help develop reforms aimed at both its sustainability and ensuring an adequate level of pensions, they said.

The IMF mission recommends fiscal prudence, citing an aging and shrinking population, a currency board arrangement and the need to keep buffers in the light of an uncertain environment. Also, the temporary reduction in VAT rates on selected goods and services, introduced as a support measure in the face of the covid pandemic, must be stopped, as it is not targeted and is regressive, Dauphan said.

Bulgaria has huge financial needs in terms of infrastructure, investment in human capital and social protection. At the same time, given the institutional framework, it is necessary to pursue a rather conservative policy towards the budget deficit and government debt. So the question is how to meet these needs without increasing the deficit. We see two ways to do this, said representatives of the Fund. One is tax reform. In our opinion, if, for example, income tax becomes more progressive and possibly at a higher level, it could be a tool to reduce inequalities through redistribution through the tax system, and you will be able to have more revenue to use to finance some of those needs, Dauphan said.

Another way we see is through the efficiency of government spending. In our opinion, there are significant opportunities to increase the efficiency of public investment, public spending on education, health care, social protection and in practice with the same money you could achieve a better result, he added.