Weak recovery undercuts fiscal retrenchment
Overview:
Bulgaria grew rapidly before the economic global crisis hit and ran some of the largest external account imbalances in the region (relative to GDP) while doing so. Some stability has been offered by the combination of the Currency Board and a good track record of tight fiscal policy. However, a sharp collapse in capital inflows and domestic demand has made the economic recovery weaker than in most countries in the region and even more unbalanced. Positive developments with regards to industrial production and export growth have not yet managed to drag GDP growth back into positive y-o-y territory though that is likely to happen soon. The current account deficit has fallen dramatically. Fiscal policy must be tightened further and competitiveness improved to maintain the exchange rate peg in the medium-term.