OECD Economic Outlook, Volume 2024 Issue 1

Bulgaria

Growth is expected to strengthen to 2.5% in 2024 and 2.9% in 2025, as government investment picks up, along with the rollout of EU funds. Private consumption growth will moderate, but it will remain strong, supported by high wage and credit growth. Improving external conditions and easing constraints on production are expected to lift trade volumes. While headline inflation has been slowing, high wage growth is an obstacle to faster disinflation. Continued political uncertainty places planned reforms and investments at risk.

Interest rates have followed those in the euro area, consistent with the currency board, but transmission to the Bulgarian economy is slow and incomplete, contributing to a household credit boom. Further macroprudential measures should be deployed to slow the pace of loan growth. The fiscal deficit is set to widen substantially with further rises in spending in 2024. A more prudent fiscal policy would therefore be warranted to manage demand and prepare for longer-run challenges. Commitments to fully implement Recovery and Resilience Facility reform measures and a comprehensive green transition roadmap would allow Bulgaria to boost trend growth and green the economy.

Recent growth has been driven by consumption and investment

Bulgaria grew by 1.8% in 2023, driven by consumption and investment. High wage growth and low interest rates have underpinned the dynamism of domestic consumption. The slow and incomplete transmission of euro area monetary policy tightening, together with high inflation, have led to an acceleration in household credit. Loan growth was particularly strong in the housing sector with annual mortgage loan growth in excess of 20% for three straight months in the first quarter of 2024. Industrial production remains weak. Annual inflation has fallen from 14% in March 2023 to 3% in March 2024.

Bulgaria: Banking and inflation indicators

Source: Bulgaria National Bank; and National Statistical Institute.

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Bulgaria: Demand, output and prices

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Trade volumes have shown signs of recovery in 2024. Export volumes declined in 2023 reflecting both external demand weakness and supply-side constraints in industrial production. These factors also contributed to the decline in import volumes during the same period, which was driven by a sharp decline in imports of raw materials. The switch away from Russian crude, maintenance work in one of Bulgaria’s main nuclear power plants and declining energy prices have damped the value of energy exports.

Fiscal policy is expansionary

Interest rate developments will continue to follow euro area monetary policy, given the currency board regime and planned euro adoption. The deficit is currently at moderate levels but is set to widen significantly. The 2024 budget targets a 12.1% nominal spending increase with the growth in spending reflecting higher social transfers, including an 11% increase in minimum pensions along with a steep rise in public sector salaries. Higher capital spending for municipal infrastructure projects and defence are also envisioned. Reduced VAT rates for bread, flour, and restaurant and catering services remain in place, but these temporary fiscal support measures will be withdrawn by year-end.

Growth is expected to recover

Growth is set to rebound to 2.5% in 2024 and 2.9% in 2025. Low unemployment and high wage growth will help to support consumption. Receipt of the second tranche of EU funds, totalling EUR 724 million (0.7% of GDP) this year, is expected to boost public and private investment. Exports should recover in line with external developments. Inflation is set to slow to 3% in 2024, driven by declines in global food and energy prices along with announced measures by the government to cover the cost of university tuition and cardiovascular medicines, but core inflation will be sustained by high nominal wage growth. Elevated wage pressures, paired with persistent labour shortages, will make it more difficult to bring inflation in line with that of other eurozone countries, with headline inflation projected to be 2.8% in 2025. Difficulties and delays in the passage of reforms required to release EU funds risk a reduction in fund amount and complementary investments.

Further macro-prudential policy and a more prudent fiscal policy is warranted

Macroprudential measures, including a tightening of loan-to-value ratios, or measures to withdraw excess liquidity are needed to reduce growing credit risk. Given strong growth in the economy and low interest rates, a more prudent fiscal policy is warranted. Revisions of the current minimum wage indexation mechanism to slow the pace of wage growth, and to reflect industry and regional income differences would help to maintain competitiveness. Further steps to reduce the size of the informal sector can enhance revenue mobilisation and raise productivity. Fiscal resources should be redirected towards activation policies and efforts to enhance workforce skills. A commitment to implement thoroughly the agreed reform milestones of the Recovery and Resilience Facility is needed to unlock and reap the full benefits. An overarching governmental strategy to motivate green transition policies, complementing the ongoing rollout of RRF funds, would help to achieve climate objectives.