The International Monetary Fund (IMF) has recommended that Bulgaria tighten its fiscal policy, shifting focus from supporting consumption toward promoting high-quality investment. According to the IMF mission led by Fabian Bornhorst, which is presenting its final report today, the government should prioritize mobilizing additional revenues to meet growing demands in infrastructure, healthcare, and education, while addressing social inequalities.
Bornhorst emphasized that euro adoption represents a key milestone for Bulgaria, offering an opportunity to strengthen institutions, increase confidence in government policies, and stimulate medium-term economic growth. “The government has made significant progress by securing the country’s accession to the eurozone, adopting the 2025 budget, and renegotiating the Recovery and Resilience Plan,” he noted.
Economic momentum in Bulgaria remains robust, with a tight labor market and high inflation. Wage growth has supported income convergence toward the EU average, but productivity gains have lagged behind. Credit expansion, particularly in mortgages, continues at a rapid pace, coinciding with rising house prices. Despite these pressures, economic activity is expected to remain strong, underpinned by solid private consumption.
The IMF warns that fiscal policy must be carefully calibrated to fully realize the benefits of euro adoption, sustainably raise living standards, and avoid macrofinancial imbalances. Policymakers are urged to maintain fiscal discipline, manage risks associated with the euro transition, and accelerate structural reforms. A predictable and consistent policy framework, the Fund argues, is essential to achieving these objectives.
Headline inflation is projected to average around 3.5% in 2025 and 2026, moderating only gradually thereafter. Wage dynamics are a significant factor: increases in minimum wages, public sector pay indexed to averages, and tight labor markets stimulate domestic demand while contributing to rising costs. As labor costs outpace productivity growth, profit margins are pressured, reinforcing wage-driven inflation.
Euro adoption is expected to provide an immediate boost to Bulgaria’s economic outlook by enhancing institutional credibility, reducing transaction costs, and strengthening investor confidence. Some of these benefits are already visible in narrower sovereign spreads and recent credit rating upgrades. Measures such as dual price display in leva and euro, price monitoring, and public information campaigns aim to address concerns and broaden support, with historical experience suggesting that currency changeover effects on prices are likely to be small and temporary.
However, risks persist. Strong domestic demand could lead to overheating and prolonged inflationary pressures. Rapid credit expansion and increasing mortgage exposure may generate vulnerabilities in the financial system. Without carefully calibrated policy responses, these trends could produce macrofinancial imbalances. Structural reform momentum may also slow after euro adoption, particularly in periods of political uncertainty, jeopardizing the benefits of integration. External factors, including weak growth in trading partners, geopolitical tensions, and trade uncertainties, could further affect Bulgaria’s economic trajectory.
The financial sector remains resilient. Banks are well-capitalized, with ample liquidity and low non-performing loan ratios, despite rapid credit growth. Stress tests indicate that Bulgarian banks can withstand severe shocks. Nonetheless, some consumer credit is increasingly channeled to non-bank lenders, which face less stringent regulations and exhibit higher non-performing loan levels. Expanding the role of non-bank financial institutions, including insurance companies and investment funds, is necessary to deepen financial intermediation and diversify household investment options in the context of rising incomes.
Rapid household lending, particularly for mortgages, poses systemic risks. Mortgage growth, combined with rising construction costs, has driven a 15% increase in house prices. Some loans are used to acquire vacant properties for investment, straining affordability in certain market segments. The IMF supports the Bulgarian National Bank’s close monitoring of these developments to mitigate systemic risks in the housing market.
In the shorter term, the IMF recommends a combination of revenue and expenditure measures to control the 2025 budget deficit, which may exceed the planned 3%. Measures include tightening fiscal policy, increasing property taxes and social security contributions, freezing public sector wages, and reducing government spending by roughly 1% of GDP. Bornhorst also advocates for abolishing the maximum insurance threshold and pension ceiling, as well as transitioning to a progressive personal income tax.
Accelerating structural reforms remains crucial to increase productivity, deepen integration with the EU single market, improve governance, and ensure effective use of funds under the Recovery and Resilience Plan. Energy sector reform is also emphasized, given Bulgaria’s high energy intensity and dependence on fossil fuels. Bornhorst stressed that targeted support for energy-poor households and a more competitive electricity market would enhance investment incentives and market efficiency.
Regarding pensions, the IMF recommends comprehensive reforms to ensure sustainability and adequacy, as the pay-as-you-go system faces deficits exacerbated by an aging population. Strengthening financial sustainability will require higher contribution revenues, including removing the ceiling on social security income, which currently does not keep pace with wage growth.
Bornhorst concluded that Bulgaria’s tax policy must be assessed to ensure it can finance long-term public needs and promote fairer distribution of resources. He highlighted the pressures from population aging, infrastructure investment, defense spending, and rising social demands, which will increase public service requirements.