Room for expansion?

Bulgaria's economy will expand by just one per cent this year and there was a serious risk for an even slower growth, the International Monetary Fund (IMF) said in a report...

In the worst-case scenario, the economy will be in a recession by the end of 2010, with real gross domestic product (GDP) falling by three per cent this year and one per cent in 2010.

Bulgaria's economy grew by a real six per cent in 2008 and most analysts have so far predicted a modest growth in 2009. The IMF's previous forecast was for two per cent growth.

Reining in the rise in wage is just one of the measures Bulgaria should take to shelter from the crisis, according to the report. Government should curb public spending if it is to meet its Budget surplus target of two per cent of GDP. At any rate, it would miss its goal and have a surplus of no more than 1.4 per cent of GDP or even a deficit, the IMF forecast.

Another buffer against the crisis would be restricting the rise in wages or increasing labour productivity because the growing gap made Bulgaria less competitive.

Bulgarian banks' foreign owners have restricted capital flows to their local branches, although the latter had enough capital at the moment and the banking system was well equipped to deal with the downturn. Banks have booked handsome profits so far, but ebbing financial resources were likely to erode their profits, the IMF said.

The institution welcomed the Bulgarian National Bank (BNB) moves to make more liquidity available for local lenders. One of the main tasks for the country was protecting confidence in the currency board, which pegs the lev to the euro.

The mechanism Bars the central bank from acting like a lender of last resort but the Government can assume that role through the fiscal reserve, which now stands at 18 per cent of the country's GDP, the report said.

In the pessimistic scenario, Bulgaria's GDP would shrink by three per cent if net capital inflows fell to zero. As the Cabinet's optimism cooled off in the final months of 2008, fiscal policy was adjusted to bleaker economic forecasts.

The Government officially targets 4.7 per cent economic growth, a figure both Finance Minister Plamen Oresharski and BNB Governor Ivan Iskrov have dismissed in recent months as overly optimistic, saying instead that growth of about two per cent was achievable.

The IMF advised the central bank to apply stress tests to check banks' credit and liquidity risks. The Financial Regulation Commission (FSC) should implement effective oversight on stock market trade and the settlement system as well as revise pension insurance regulations, the report said.

Source: www.sofiaecho.com