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.

Poverty and income inequality remain among the highest in the EU, pointing to the need for improved targeting and more adequate social support. Amid a rapidly aging and declining population, convergence to the EU can speed up only if the productivity gap shrinks markedly and governance and institutional weaknesses are decisively addressed.

Last Updated: Oct 13, 2021

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 (WBG), is promoting policies to address the gap between institutions and to improve service delivery.

The WBG 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, 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 a 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 WBG program does not require significant modifications.

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

Last Updated: Oct 13, 2021

Recent Economic Developments

Following a contraction by 4.2 percent in 2020, the economic recovery gained momentum in the second quarter of 2021 with robust growth in export, consumption, and investment. The economy is forecasted to expand by 3.7 percent in 2021 even if it is not likely to reach its pre-crisis levels before 2022. So far, and in contrast to some peers, inflation remains under control, at 3.7 percent year-on-year (y-o-y) in August 2021, but may accelerate in the reminder of the year on the back of import inflation.   

The labor market showed initial signs of improvement in the second quarter of 2021 when unemployment declined to 5.6 percent. The banking sector remains stable, with nonperforming loans at 6.7 percent as of end-June 2021 against 8.1 percent a year ago.

The fiscal stance loosened notably in 2020 due to the economic downturn and the Government’s support measures. The deficit reached 3 percent of GDP in 2020 and is projected to widen further in 2021, as most private sector support measures remain in effect while temporary pension supplements have been transformed into a permanent increase in pensions. Even if public debt grew in 2020 due to the deficit financing needs, it remained relatively low by EU standards at 25 percent of GDP as of end-2020.

Economic Outlook

In the near term, the biggest risk to the economic recovery is the slow pace of COVID vaccinations - the slowest in the EU to date. With some 36 doses per 100 population administered as of end-September compared to more than 100 in most EU countries, Bulgaria is heading toward another peak of infections in early autumn, which may lead to new restrictions, depending on the capacity of hospitals to handle the wave.

Potential restrictions would also weigh heavily on an already stretched budget and could lead to further overshooting of the deficit above 4 percent of GDP in 2021 before the country embarks on fiscal consolidation. As the national plan is yet to be finalized, absorption of the EU Recovery and Resilience Facility (RRF) envelope for Bulgaria is not likely to start before 2022, which would put an additional strain on the budget.

Political instability is another source of risk to the outlook. The country is heading toward a third round of early elections in November following snap elections earlier in the year that failed to produce a ruling majority.

Poverty is anticipated to decline from 6.8 percent in 2020 to 6.2 percent in 2021, using the upper-middle-income purchasing power parity poverty line of $5.50 per day. The decline is largely attributable to improvements in household finances stemming from a rebound in the labor market as well as continued government support in the form of wage subsidies and pension supplements. Despite these improvements, poorer households continue to report higher levels of economic distress as the longevity of the crisis strains already limited economic resources.

Last Updated: Oct 13, 2021