The World Bank In Bulgaria

Country Context

*Most recent WDI value (2021) 

Bulgaria has undergone a significant transformation over the past three decades. It has moved from a highly centralized, planned economy to an open, market-based, upper-middle-income economy securely anchored in the European Union (EU). 

Bulgaria’s EU accession in 2007 raised expectations that living standards would rapidly rise and match average EU levels in a relatively short time span. By 2022, convergence reached 62% of the average GDP per capita in the EU in purchasing power parity terms but the country remains the poorest EU member state. Following a series of external crises—including the global financial crisis, the European debt crisis, the COVID-19 pandemic and Russia’s invasion of Ukraine—foreign investment inflows dried up and reform progress slowed, dampening the pace of convergence toward average EU incomes.

To reach average EU income levels in the next 15 years, ambitious reforms and policies would be required to spur economic growth. These include addressing institutional and governance weaknesses, ensuring fair competition to boost firms’ efficiency and private sector expansion, along with investing in skills. In parallel, persistent inequalities, including income inequality and inequalities of opportunities would need to be addressed. 

Last Updated: Apr 10, 2024

Strategy

Since the opening of its office in the country 30 years ago, the World Bank has developed a robust partnership with Bulgaria.

During the past three decades, the World Bank has provided $3.3 billion in financing spread across 45 operations. Throughout the partnership, World Bank engagement has been tailored towards transforming the economy from a centralized and planned one to an open and market-based upper middle-income EU country. 

In its reform efforts, Bulgaria has engaged the World Bank Group in strategic areas of the development agenda. The Government of Bulgaria, in its partnership with the World Bank Group, is promoting policies to address the gap between institutions and improve service delivery. 

Key Engagement

The partnership with Bulgaria is presently characterized by knowledge and advisory services, provided through Reimbursable Advisory Service (RAS) arrangements, and supported by EU funding.

In 2022, a new Framework Agreement for Reimbursable Advisory Services was signed allowing the Government of Bulgaria to benefit from the World Bank’s global knowledge and expertise in the 2021–2027 EU-programming period. Currently, there are three active RAS agreements with three more in preparation in the areas of e-governance, transport, and energy. 

The latest Country Partnership Framework (CPF) for Bulgaria endorsed by the Board in May 2016 covered a period of six years to be aligned with the EU programing cycle. 

The new World Bank Group Country Partnership Strategy for Bulgaria is expected to be presented to the Board in the coming months. The World Bank’s engagement will focus on making Bulgaria a green, resilient, and productive economy while providing equal opportunities for all. The partnership is informed by the objectives in the National Recovery and Resilience Plan (NRRP) and aims at completing Bulgaria’s unfinished reform agenda and unlocking the country’s growth potential. 

Last Updated: Apr 10, 2024

Recent Economic Developments

Despite the stagnation of some of its key export markets, Bulgaria’s economy managed to stay afloat in 2023 thanks to robust private consumption. Nevertheless, the economy’s expansion slowed down to 1.8% in 2023, as strong household consumption was offset by stagnating government spending and a slump of gross capital formation.

The deceleration of economic activity resulted in a moderate decline of employment in the second half of the year. Yet, average real wage growth came close to 5% for 2023, exceeding labor productivity growth and fueling concerns about the country’s competitiveness.

Following 2022, when Bulgaria recorded one of the highest inflation rates in the EU, consumer price growth eased in 2023. However, disinflation was slow and annual average inflation reached a 15-year high of 9.5% in 2023.

The fiscal position remains sound. WB estimates suggest that on accrual basis the fiscal deficit reached 2.4% of GDP in 2023, or below the 3% Maastricht ceiling. The EC’s Convergence Report on Bulgaria’s readiness for eurozone accession is expected in June 2024. For the moment, inflation remains the only challenging Maastricht criterion for accession, but the gap between actual inflation rates and the line benchmark is shrinking rapidly.

Outlook

The economy’s growth is expected to pick up in 2024-2025 with the expected recovery in the eurozone. Despite that, the government has put off fiscal consolidation, and sets a (cash-basis) 3% fiscal deficit target for 2024 on the back of an ambitious capital spending program.

Even if the banking sector remains stable and highly profitable, the ongoing credit expansion – mirrored by a construction boom – fuels concerns about the build-up of a construction-credit bubble. The latter may lead to a painful correction and increase of non-performing loans, going forward.

Last Updated: Apr 10, 2024