IMF Urges Bulgaria to Tighten Fiscal Policy Amid Strong Demand and Elevated Inflation

IMF Calls for Fiscal Discipline in Bulgaria

The International Monetary Fund (IMF) has urged Bulgaria to implement a tighter fiscal policy and shift its investment focus towards quality projects. This recommendation emerged from the IMF's Executive Board conclusion of the 2025 Article IV Consultation with Bulgaria on November 24, 2025. The Fund emphasized that this approach is crucial given Bulgaria's strong underlying demand and cyclical economic conditions.

Economic Momentum and Inflationary Pressures

Bulgaria's economy is experiencing robust expansion, primarily driven by strong domestic demand. Gross Domestic Product (GDP) grew by 3.4 percent in 2024 and by 3.2 percent in the first half of 2025, propelled by sustained private consumption and significant credit growth. The labor market is notably tight, with record-low unemployment, and real wages are increasing rapidly. However, inflation has accelerated in early 2025 and remains elevated, projected to average around 3.5 percent in both 2025 and 2026.

The IMF noted that while the near-term growth outlook is positive, supported by domestic consumption and public investment under the Resilience and Recovery Plan (RRP), risks persist. These include domestic policy uncertainty, ongoing domestic demand pressures, and heightened external volatility. Productivity growth is lagging, and external demand is subdued due to slower growth in key EU markets and global uncertainty.

Key Fiscal and Structural Recommendations

To address these challenges and ensure sustainable growth, the IMF outlined several key policy adjustments:

• Fiscal Tightening: A tighter fiscal stance is recommended, with a reorientation from short-term demand support towards quality investment. This would help cool the economy, particularly as fiscal policy is expected to remain expansionary in 2025–2026.
• Wage and Benefit Moderation: Moderating public wage growth and benefit indexation could generate significant fiscal savings and ease inflationary pressures.
• Tax Reforms: In the medium term, the IMF suggests increasing tax rates for both personal and corporate income and transitioning to progressive income taxation to mobilize additional revenues. Additionally, removing the cap on insurable income is recommended to strengthen the financial sustainability of the pension system, which faces widening deficits due to an aging population.
• Spending Efficiency: Enhancing spending efficiency by strengthening public financial and investment management is crucial.
• Structural Reforms: Persistent governance reforms, sustained investment in human capital, and increased labor market participation are necessary to address productivity and demographic challenges. Improving governance and institutional quality is essential for long-term growth and building trust.

Euro Adoption and Financial Stability

The IMF views Bulgaria's upcoming adoption of the euro on January 1, 2026, as a major milestone and an opportunity to strengthen institutional credibility and investor confidence, while reducing currency risk and transaction costs.

Regarding financial stability, the IMF advises that macroprudential policy must remain nimble. Close monitoring of systemic risk in the real estate market is warranted, especially given the rapid growth of consumer credit, particularly mortgage loans, which has increased risks. The Bulgarian National Bank (BNB)'s vigilance in this area is welcomed.