site.btaWorld Bank: Bulgaria's Economy Has Slowed in Tune with Trends in Developing Economies in Europe and Central Asia

Bulgaria's economy slowed down in 2023 in tune with trends in key trading partners. Inflation kept decelerating, but the pace is slow and puts at risk the country's eurozone accession bid for 2025, according to the World Bank's Spring Europe and Central Asia Economic Update published on Thursday. Real wage increases outpaced productivity growth in 2023, fueling concerns about competitiveness. A reescalation of political uncertainty threatens the government's reform agenda, the report said.

Bulgaria succeeded to weather the recent crises relatively well, not least due to timely fiscal support for households and businesses. Economic growth declined only moderately in 2020, followed by a robust recovery in 2021-2022. The fiscal position remained strong despite increased discretionary spending in response to the shocks. The bottom-line deficit did not surpass the 3% limit in any of the crisis years and public debt – at projected 23.8% of GDP in 2023 – remains among the lowest in the EU, according to the World Bank report.

In 2015-2020, Bulgaria's economic growth improved living standards for the average and poorest 40% of households.

These improvements led to a notable 9.6 percentage points reduction in poverty over the period. However, in 2021, this positive trend was reversed due to inflationary pressures and reduced employment rates among the unskilled.

The deceleration of economic activity resulted in a moderate decline of employment in the second half of the year. Yet, nominal wages kept rising at double-digit rates y/y throughout 2023. Real average wage growth thus came close to 5% for 2023, exceeding labor productivity growth and fueling concerns about the country's competitiveness.

Consumer price growth kept decelerating throughout 2023 to reach 3.8% y/y by January 2024. Yet, disinflation has been slow and annual average inflation reached a 15-year high of 9.5% in 2023. Following the rapid deterioration of the fiscal position in early 2023, the balance improved later in the year as measures for strengthening revenue collection bore fruit. World Bank estimates suggest that on accrual basis the fiscal deficit reached 2.4% of GDP in 2023, or below the 3% Maastricht ceiling.

For the moment, inflation remains the only challenging Maastricht criterion for accession, but the gap between actual inflation rates and the line benchmark is shrinking rapidly.

Poverty reduction is expected to have slowed down in 2023 and reached 5.12%, mostly due to decelerated economic growth and still-high food and energy prices that affected adversely those whose nominal wages have not kept apace with inflation.

The economy’s growth is expected to pick up in 2024-2025 with the expected recovery in the eurozone. Bulgaria’s target to join the eurozone in 2025 may be difficult but not impossible to reach, should there be a stable government and the disinflation trend continues in the coming months, as expected.

Even if the banking sector remains stable and highly profitable (with net profit up 64% in 2023), the ongoing credit expansion – mirrored by a construction boom – fuels concerns about the build-up of a construction-credit bubble, the World Bank said in its Europe and Central Asia Economic Update.

Political risks have re-escalated after a failed PM rotation between the two ruling coalition partners that toppled the most recent regular government in March 2024. The country is now heading towards a new round of early elections – the 6th in about three years – which threaten to slow reform momentum and jeopardize the achievement of key policy goals such as near-term eurozone membership.

The government's budget sets a (cashbasis) 3% fiscal deficit target for 2024 on the back of an ambitious capital spending program. The current account is projected to keep its slight surplus in 2024-2026 due to the expected downward adjustment of import prices of key raw materials and the increase of net services export, the World Bank said.