site.btaBulgaria Well Positioned for Eurozone Entry, Economists Say

Bulgaria Well Positioned for Eurozone Entry, Economists Say
Bulgaria Well Positioned for Eurozone Entry, Economists Say
UniCredit Bulbank building in Sofia

Bulgaria’s economy is in a strong position ahead of the euro’s adoption on January 1, 2026 with no significant macroeconomic imbalances, aside from high levels of income inequality and a large share of people at risk of poverty and social exclusion, stated on Thursday UniCredit Bulbank’s Q3 Macroeconomic Review, authored by the bank’s economists Kristofor Pavlov and Elena Kostadinova.

The outlook for GDP growth remains favourable, supported by strong domestic demand driven by rapid income and household credit growth.

The bank’s baseline scenario expects consumer price inflation to ease till the end of 2025 and further into 2026. Contributing factors include the government’s planned public awareness campaign regarding euro adoption, which is expected to help anchor inflation expectations, as well as regulatory measures aimed at curbing speculative price hikes by dishonest traders.

The main risk to the bank’s positive outlook remains political stability. A collapse of the government and new elections later this year or in early 2026 could undermine the efforts of institutions responsible for euro adoption, including addressing public concerns that, without decisive action against speculation, the euro could trigger inflation.

UniCredit Bulbank has revised its 2025 GDP growth forecast up by 0.1 percentage points to 3.2%. The bank anticipated stronger growth in private consumption and investment, though the overall impact on the economy is expected to be partially diminished by weaker export performance, leading to a more negative net trade balance than previously projected.

The bank projects GDP growth of 3% in 2026 and 2.8% in 2027. In the previous forecast, these figures were 3.3% and 2.7%, respectively.

Annual inflation (based on the national consumer price index) reached 4.4% in June, which is the highest rate since December 2023. The primary driver of inflation this year has been food prices. Year-to-date food inflation in Bulgaria stands at 5.2%, the third highest among EU member states.

The baseline scenario anticipates inflation to moderate in the second half of this year and beyond, supported by a strong agricultural harvest in 2025 and the euro-awareness campaign, which should also reduce instances of speculative price increases.

Political stability remains the key risk to this inflation scenario. A government collapse could derail both euro adoption efforts and public trust, leading to heightened inflation concerns, the analysis notes.

The state budget foresees an increase in tax and social security revenue from 28.9% of GDP in 2024 to 32.7% in 2025, a jump of 3.8 percentage points. This will be supported by the end of the reduced VAT rate for bread, flour, and some tourist services, higher excise duties on tobacco products, and greater toll revenue, altogether adding about 0.5% of GDP.

The remaining 3.3% of additional revenue is expected to come from measures to reduce the size of the shadow economy, as its share in Bulgaria is estimated between one-quarter and one-third of the economy, depending on the methodology. Bringing some of this activity into the formal economy (with a tax burden of about 30%) could generate significant revenue.

Effectively, to raise tax revenues by 3.3% of GDP, the government must bring into the formal economy turnover equivalent to about 11% of GDP.

In its fiscal forecast, the bank assumes the government will achieve two-thirds of this goal. It expects Bulgaria to exceed the EU deficit threshold by up to 1% of GDP due to increased defense investment, without triggering an excessive deficit procedure, thanks to prior approval from the European Commission. The accrual-based deficit will reach 4% of GDP, while the deficit measured under the Stability and Growth Pact (SGP) methodology will remain at 3%.

After a long period of stable tax policy, Bulgaria may soon see an increase in key taxes. The bank forecasts a cumulative rise in pension insurance contributions by 3 percentage points in 2027 and 2028.

/KT/

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By 09:46 on 01.08.2025 Today`s news

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