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Bulgaria’s economy against the backdrop of inflation, coronavirus pandemic, elections and expectations for growth

The autumn economic forecast of the European Commission and the medium-term macroeconomic three-year framework of the Bulgarian Ministry of Finance have been recently published. Brussels expects Bulgaria to mark a 3.8-percent GDP growth this year and 4.1% next year. Bulgarian financiers are slightly more optimistic and forecast that in 2021 the real growth of the gross domestic product (GDP) would reach 4%, and in 2022 – 4.9%.

In both documents, the growth is expected to be generated by investments – both public and private, as the focus is on EU funds under the Recovery and Resilience Plan. The forecast is good at the backdrop of the economic downturn marked last year, but would be a relatively modest achievement compared to the much faster economic growth rates of a number of EU Member States, reaching 6-8% of GDP growth per year.

This year, after several years of stagnant prices, inflation is expected to reach 3.8%, according to the Ministry of Finance. European analysts predict lower rise in inflation in Bulgaria and say the year will end at a level of 2.4%, with a forecast for next year of 2.9%. This is again caused by high prices of energy and their secondary effects. These forecasts look a bit strange when keeping in mind the fact that the annual inflation for October is as high as 6%, while 80% of Bulgarian companies are worried about the prices of energy and raw materials next year, according to a European survey.

The rise in consumer prices has two aspects - positive and negative. First, from the consumer's point of view, this means a decline in their purchasing power, which already is one of the lowest in the EU as the average gross monthly salary is 789 euros. However, according to experts from the Institute for Market Economics, the rise in prices lags behind the growth of wages and the purchasing power of Bulgarian consumers continues to grow slightly.

The second aspect of inflation is that the rise in consumer prices leads to a rise in VAT revenues for the state treasury. This is good for public finances, as during the Covid crisis more and more money is invested in anti-epidemic measures, in the health system and in support of the most affected sectors of the economy. Bulgaria holds one of the last places in Europe when it comes to the number of vaccinated citizens and one of the first places in terms of the number of deaths as a result of the pandemic, and the costs of the fight against the coronavirus are covered by public finances. It is no coincidence that the state is increasingly resorting to loans to compensate for the shortage of funds. On Monday, new government bonds for over 250 million euros were issued and that is how the new state debt accumulated during the year has reached over 1.7 billion euros.

The Bulgarian economy faces a number of challenges, including the political instability over the past six months. This affects the business climate in the country. However, the Bulgarian economy has been coping with the situation in anticipation of greater security and predictability.

English: Alexander Markov

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