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Country Context

*Most recent WDI value (2021) 

Bulgaria has undergone a significant transformation over the past three decades. It has moved from a highly centralized, planned economy to an open, market-based, and as of July 1, 2024, a high-income economy securely anchored in the European Union (EU). 

Bulgaria¡¯s EU accession in 2007 raised expectations that living standards would rapidly rise and match average EU levels in a relatively short time span. By 2023, convergence reached 64% of the average GDP per capita in the EU in purchasing power parity terms but the country remains the poorest EU member state. From 2016 to 2020, economic growth led to improved living standards and significant poverty reduction. However, this trend reversed in 2021 due to the lingering effects of the pandemic, inflation, and rising unemployment among the less educated. Income inequality remains high, making the country the most unequal EU member.

Bulgaria continues to face multiple development challenges. A key horizontal constraint is deep-rooted institutional and governance weaknesses, which enable state capture by vested interests and discourage investment. This suppresses productivity and private sector growth, while also resulting in suboptimal public services. A rapid decline of the population¡ªone of the worst globally ¡ªalso limits the country¡¯s economic potential while exerting increasing pressure on public systems.

Last Updated: Oct 23, 2024

Strategy

On September 12, 2024, the World Bank Group¡¯s Board of Executive Directors endorsed the new (CPF) FY25-29 for Bulgaria aimed at enhancing competitiveness and social inclusion, while promoting a low-carbon and more sustainable economy. This new CPF provides a roadmap for World Bank Group engagement for the current EU programming cycle through 2029. Bulgaria keeps its access to all World Bank Group instruments, including financing, through three institutions: 

• The International Bank for Reconstruction and Development (IBRD) lends to governments of middle-income and creditworthy low-income countries. During the past three decades, the IBRD has provided to Bulgaria $3.3 billion in financing spread across 45 operations.
• The International Finance Corporation (IFC) is the largest global development institution focused exclusively on the private sector. The IFC program in Bulgaria totaled $ 690.9 million, comprised of $109 million on IFC¡¯s own account and core mobilization of $582 million, across six projects linked to infrastructure, insurance, healthcare, and trade finance.
• The Multilateral Investment Guarantee Agency (MIGA), created in 1988 to promote foreign direct investment into developing countries, fulfills this mandate by offering political risk insurance (guarantees) to investors and lenders. As of October 2024, MIGA did not have active outstanding exposure in the country.

Key Engagement

The IBRD partnership with Bulgaria is presently characterized by knowledge and advisory services, provided through Reimbursable Advisory Service (RAS) arrangements, and supported by EU funding.

The new CPF marks a renewed engagement with Bulgaria, with a sharpened focus on climate and digital development, while maintaining the emphasis of the previous CPF on improving institutions and investing in people for enhanced competitiveness and inclusion. The program was informed by the 2022 Systematic Country Diagnostic Update, which recommended adopting a more sustainable growth model and identified key development challenges, like strengthening institutions, boosting productivity, skills, and employability along with increased effectiveness, efficiency, and adequacy of public spending for improved service delivery.

Last Updated: Oct 23, 2024

Recent Economic Developments

The Bulgarian economy has embarked on a recovery path in early 2024 aligned with the moderate pick-up of activity in the Eurozone.

The first two quarters of 2024 saw a recovery of GDP growth to 1.9% and 2% YoY, respectively, in line with the firming of growth in the wider EU. Noteworthy, while growth in Q1 was driven by final consumption, Q2 saw exports embarking on a recovery path, too. Consumption was fed by unabating wage growth, which accelerated to 13% and 15% YoY in real terms in Q1 and Q2 2024, respectively, due to a hike of the minimum wage by 19% from start-2024 and long-standing labor shortages. 

Consumer price inflation kept decelerating in the year to date, further improving the purchasing power of households. Annual average HICP inflation slowed to 4.3% in July, which narrowed the gap with the line criterion for Eurozone entry to just 1.3 percentage points. Should this disinflationary trend continue, Bulgaria could meet the criterion¡ªwhich is the only remaining hurdle to euro adoption¡ªbefore year-end. 

Outlook

The economy¡¯s growth is projected to pick up in 2024-2025 with the expected recovery in the Eurozone. This is expected to have a benign impact on domestic poverty reduction, while also keeping Bulgaria on its convergence path towards average EU incomes. Bulgaria¡¯s target to join the Eurozone from mid-2025 or January 2026 is also within reach, should the disinflation trend continue in the coming months, as expected.

Credit to households remains on the radar due to its accelerating growth that reached 19 percent YoY in June 2024. The increase was propelled by long-term household mortgage loans and consumer loans (with above 5-year maturity) which grew by 25% and 15% YoY, respectively, in June. This trend is mirrored by an ongoing construction boom and fuels concerns about the build-up of a construction-credit bubble, which may be followed by a painful correction and increase of non-performing loans.

Last Updated: Oct 23, 2024