Updated convergence programme of Bulgaria, 2007-2010 - Main contents

EN

Official Journal of the European Union

C 73/1

On 4 March 2008, the Council examined the updated convergence programme of Bulgaria, which covers the period 2007 to 2010.

Real GDP growth has been high at over 6 % per year since 2003, while large external deficits have accumulated. Accordingly, the general government balance has been raised from a position close to zero to a surplus of over 3 % of GDP in 2006, with the fiscal stance being counter-cyclical or broadly neutral since 2003. At the same time, monetary conditions have been accommodative within the context of the currency board framework. Strong economic growth has been accompanied with signs of overheating and increasing macroeconomic imbalances reflected in a widening external deficit, re-acceleration of bank credit growth, and rising inflation.

However, the growing external deficits in Bulgaria reflect to a large extent an investment boom driven by considerable FDI inflows. Inflation was mainly triggered by externally induced increases of food and energy prices. However, with unemployment falling sharply, the labour market has tightened and in 2007 wage growth also accelerated considerably, clearly outpacing productivity growth for the first time in several years. If these developments were to continue, they could lead to an erosion of competitiveness and call into question the sustainability of high growth, even though, thanks to moderate real wage increases until 2006 and accumulated productivity gains since 1998, the cost competitiveness has been largely preserved. Looking ahead, Bulgaria is confronted with the challenges of tackling these imbalances while strengthening the conditions for sustained catching-up through maintaining prudent fiscal policy and wage moderation, improving the quality of public finance, ensuring financial sector stability, and stepping up structural reforms.

The macroeconomic scenario underlying the programme envisages that real GDP growth will pick up from 6,4 % in 2007 to 6,7 % on average over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on broadly plausible growth assumptions, although slightly favourable especially towards the end of the programme period when growth in domestic demand, in particular investments, appears to be on the high side. Against the background of high real GDP growth, the programme projects limited progress towards nominal convergence with inflation remaining relatively high. Moreover, given the projected sustained wage pressures and planned increases in excise duties on tobacco the inflation projections appear to be on the low side in 2009 and 2010. Although the composition of growth is expected to become slightly more balanced on the back of higher export growth, the external deficit would widen further and is projected to peak at 20,75 % of GDP in 2008, which appears broadly plausible in light of recent developments.

For 2007, the general government surplus is estimated at 3,1 % of GDP in the most recent update of the programme, against a target of 0,8 % of GDP set in the January 2007 convergence programme. This budget over-performance is entirely due to higher than expected revenues, while...