Looking ahead

A healthy financial system was critical to economic recovery, but Bulgaria had no reasons to worry on that front, the IMF said. With a capital adequacy ratio of 17.6 per cent at end-June, Bulgaria’s banking sector was still on average profitable in the first half of the year despite increased provisions for non-performing loans.
Stress tests by the Bulgarian National Bank suggest that banks’ currently strong capital buffers would cushion the system against further deterioration in asset quality, the IMF said.

"As the Bulgarian economy emerges from the recession, it will need to shift to a new growth pattern relying more on the tradable sectors," the Fund’s mission said. With salaries in the public sector rising by 17 per cent year-on-year in the second quarter and 14.3 per cent in the private sector, the IMF recommended that Bulgaria finds ways to moderate wage growth.

In sum, the global economic crisis has hit Bulgaria hard. In the near term, fiscal discipline needs to be restored in a difficult economic environment, and in the longer term structural reforms are key to steering the economy towards a more sustainable growth pattern. We welcome the commitments of the new Government,the Fund said. 

The alternative
Romania, along with whom Bulgaria joined the EU in 2007, recorded the highest economic growth ratio in the bloc in 2008, but was hit even harder by the economic recession after capital inflows dried out. It became the third EU member state to agree a bailout with the IMF and the European Commission in May has already received 6.57 billion euro from the Fund, including 1.85 billion euro in the latest disbursement on September 21.

The IMF praised Romania’s implementation of policies on which the bailout was made conditional, but said that "additional reforms to strengthen controls over areas that pose the largest fiscal risk, including expenditure commitments, pension reform, contingent liabilities, and public entities outside the central government", were needed.

But the package of IMF-mandated laws, including the law that stipulates minimum and maximum pay levels in the public administration, are bitterly opposed by labour unions and the opposition. Public servants, doctors, teachers and police officers have announced a nationwide strike on October 5 to protest against the law.

Opposition politicians have asked for a vote of no confidence in parliament, arguing that the law was hastily drafted and arbitrary. The motion is scheduled for September 24, but the cabinet is expected to survive the vote, despite growing rifts within the two-party coalition government.