The World Bank In Bulgaria

Country Context

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). In its initial transition to a market economy, the country went through a decade of slow economic restructuring and growth, high indebtedness, and loss of savings. 

However, the advancement of structural reforms starting in the late 1990s, the introduction of a currency board, and expectations of EU accession unleashed a decade of exceptionally high economic growth and improved living standards. Yet, some legacy issues from that early period, the global economic crisis of 2008, and the pandemic-induced crisis in 2020 undid some of the gains achieved during the high-growth period. 

The long-term structural challenges facing Bulgaria include negative demographic trends, coupled with institutional and governance weaknesses. Institutional gaps have been mirrored by suboptimal public service delivery, hindering private sector expansion and undermining inclusive growth and shared prosperity. High rates of inequality of opportunity limit access to key public services, constraining the ability of individuals to escape poverty and thus leading to persistently high income inequality. Poverty and inequality are reinforced by inadequacies in the targeting, coverage, and generosity of the social security system, limiting its role as a redistributive mechanism.

Last Updated: Apr 19, 2022

Strategy

Since the opening of its office in the country more than 29 years ago, the World Bank has developed a sound partnership with Bulgaria.

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

The World Bank will continue to align its program with the Government’s priorities in a way that creates space for broader engagement where there is potential for a transformational impact. 

Key Engagement

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

On September 1, 2015, Cyril Muller, the World Bank’s Vice President for Europe and Central Asia, and Tomislav Donchev, Bulgaria’s Deputy Prime Minister for EU Funds and Economic Policies, signed the second Memorandum of Understanding on partnership and support in the implementation of European Structural and Investment Funds for the 2014–20 period. 

The current Country Partnership Framework (CPF) for Bulgaria, endorsed by the Board in May 2016, covers a period of six years to coincide with the EU programing cycle. The CPF marks a renewed engagement with Bulgaria, including the first new lending operation since FY11.

The FY19 CPF Performance and Learning Review (PLR) reconfirmed that the main areas of engagement remain relevant and that the Bank program did not require significant modifications. 

The new EU financial framework for 2021–27, including the NextGenerationEU envelope, will require continued strengthening of the state and its institutions, and the Bulgarian Government has expressed continued interest in Bank support for this objective.

Last Updated: Apr 19, 2022

Recent Economic Developments

Following a contraction by 4.4 percent in 2020, economic recovery gained momentum in 2021. The economy grew by 4.4 percent in 2021, with export and consumption acting as the main growth engines. 

Like most European countries, Bulgaria has seen a rapid acceleration of inflation since summer 2021, reaching 10.0 percent year-on-year in February 2022. Inflated prices of imported energy and the second-round effects were key pro-inflationary factors. The inflationary shock on households and businesses was partly cushioned by a temporary freeze on regulated prices of electricity, heating, and water, as well as government subsidies of electricity costs for local companies. 

However, despite the boost in fiscal revenues on robust economic growth and inflation, the Government ended 2021 with a budget deficit of 2.9 percent due to the continued anti-crisis support to businesses and individuals. Amid the recovery of the economy and continued government support, poverty is projected to have slightly declined from 6.3 percent in 2020 to 6.2 percent in 2021, using the upper-middle-income poverty line of US$5.50 per day.

Economic Outlook

The ongoing war in Ukraine has provoked a revision of growth forecasts globally, with Bulgaria’s GDP growth in 2022 revised by 1.2 percentage points against the earlier forecast to 2.6 percent. Risks remain tilted to the downside, and further downward revisions are likely to follow if there is a prolonged military conflict or a new disruptive COVID wave amid low vaccination rates. 

The acceleration of domestic inflation since late 2021 is likely to remain in place at least in the first half of 2022, as inflated prices of energy and food are exacerbated by the ongoing war in Ukraine. This will result in a further erosion of purchasing power, a likely increase in poverty, and a higher fiscal cost, particularly if the government extends its current support to businesses and individuals. 

Overall, the draft 2022 budget suggests that fiscal policy will depart from the conservative stance adhered to in the past two decades. The fiscal deficit is likely to exceed the Government’s plan for 4.1 percent of GDP, as the latter rests on a fairly optimistic official growth projection of 4.8 percent. A government-sponsored accommodation program for displaced Ukrainian nationals will also weigh on the expenditure side. In addition, a budget revision—which is likely to boost expenditure further—is already planned for the summer. 

The political crisis that dominated the national landscape since early 2021 was finally overcome after a four-party coalition took office in the wake of the November 2021 elections. There are high expectations on the new government to undertake structural reforms in a number of areas, including in the judiciary and in the control of corruption.

Last Updated: Apr 19, 2022