Bulgaria’s economy is projected to continue expanding at a steady pace, but the International Monetary Fund (IMF) warns that mounting structural pressures demand urgent policy responses.
The institution’s 2025 consultation, approved through the “silent procedure,” outlines both the country’s strong near-term prospects and its deepening long-term vulnerabilities.
The report follows a September mission led by Fabian Bornhorst, which found domestic demand to be the primary engine of Bulgaria’s recent growth. Gross domestic product grew by 3.4 percent in 2024 and by 3.2 percent in the first half of 2025, supported by strong household consumption, vigorous credit activity, and a looser fiscal stance.
Unemployment remains at record lows and real wages continue to rise at a rapid pace. Bulgarian incomes are gradually catching up with European norms, but inflation remains elevated and productivity improvements lag behind wage growth. These dynamics, the IMF warns, create persistent overheating pressures.
The Fund expects economic growth to hover around 3 percent in both 2025 and 2026, backed by domestic consumption and public investments tied to the Recovery and Resilience Plan.
Headline inflation is forecast to remain around 3.5 percent before gradually easing in the medium term. However, the outlook remains vulnerable to volatile global conditions and uncertainty over domestic policy direction.
A central focus of the IMF assessment is the sustainability of Bulgaria’s public finances. The deficit in the pay-as-you-go pension system continues to widen, a trend the Fund says will accelerate as the population ages.
Ensuring long-term stability will require stronger contributions, including the removal of the ceiling on maximum social security income — a measure already included in the draft budget, alongside a two-percentage-point increase in pension contributions.
The IMF points out that Bulgaria’s preparations for adopting the euro have boosted investor confidence. Sovereign spreads have narrowed, and credit rating agencies have upgraded their assessments in anticipation of entry into the eurozone’s exchange-rate mechanism.
Still, the Fund emphasizes that Bulgaria’s current flat tax system no longer generates the revenue needed to support rising expectations for quality public services.
It recommends gradually transitioning toward a progressive income tax system and raising both personal and corporate tax rates over the medium term. These changes align with the IMF’s repeated calls for tighter fiscal policy in 2026 to counter overheating pressures.
A more neutral fiscal position, the Fund argues, could be reached through a combination of restrained spending and fresh revenue measures. This includes moderating wage increases in the public sector and containing growth in social transfers.
The IMF also calls for greater transparency around the recapitalization of state-owned enterprises, which has quietly increased public debt despite relatively low overall risk.
Financial stability concerns also feature prominently in the report. The Fund warns that rapid credit growth — particularly in mortgage lending — is amplifying risks in Bulgaria’s housing market.
While banks remain resilient, signs of overheating are becoming more apparent. The adoption of the euro, which would reduce reserve requirements, may release additional liquidity into the banking system, potentially fuelling more aggressive household lending.
To mitigate these risks, the IMF urges the Bulgarian National Bank to apply borrower-focused risk-management tools and maintain a flexible macroprudential stance. Such measures, it says, will be essential to contain housing market pressures and ensure credit quality.
Overall, the IMF concludes that Bulgaria’s economy is on a solid footing but must confront significant long-term challenges. Demographic pressures, widening pension deficits, and an overheating property market all demand decisive policy action.
Structural reforms and a reassessment of the country’s tax model, the Fund stresses, will be crucial to safeguarding Bulgaria’s economic future.
This article was created using automation technology and was thoroughly edited and fact-checked by one of our editorial staff members