World Bank: Bulgaria's Economy will slow down due to War, Inflation and COVID-19

Almost a third slower - compared to the forecast from January - will be the growth of the Bulgarian economy in 2022 due to the war in Ukraine and the risks of prolonged military conflict, point to further adjustments to downward growth. Instead of 3.8% of GDP, the new expectations are for 2.6%, i.e. adjustment for growth contraction of 1.2 percentage points.

The forecast is from the World Bank in its spring report, released a week before the joint meetings with the International Monetary Fund scheduled for the end of the week.

Another risk that the bank points out is the return of COVID-19 waves due to the low level of vaccination in the country.

Inflation, which is a global problem and reached 10% in Bulgaria in January, will continue to shrink the purchasing power of Bulgarians and increase poverty at least until the middle of the year. Expectations for 2022 are for annual inflation of consumer goods of 9.3%, which is almost three times more than 3.3% from 2021 and incomparably higher than 1.7% in 2020. There will be serious pressure on the government to compensate for the damage from the war and inflation with fiscal measures, which means an additional outflow of funds into the economy with inflationary consequences.

Delays in the Recovery and Sustainability Plan and operational programs under the EU budget for 2021-2027 will also reduce economic growth because they have limited the government's intentions to significantly increase public investment in 2022.

Overall, in the medium term, growth is likely to be driven by two factors: public investment in EU funds and improved business expectations due to Bulgaria's impending entry into the Eurozone. Net foreign direct investment in Bulgaria will continue to decline over the next three years by an average of 1.7% per year.

An adjustment to the budget approved at the end of February is already expected in the summer, and the World Bank believes that the conservative fiscal policy of the Bulgarian government over the past two decades is over, at least for now. The fiscal deficit is likely to exceed 4.1% of GDP, projected for optimistic economic growth of 4.8% even before Russia invades Ukraine.

Expected main driving factors for economic growth in Bulgaria

The report notes as a positive moment the formation of a government after the political crisis that lasted almost throughout 2021. “There are high expectations that the cabinet will undertake structural reforms in a number of areas, including the administration of justice and the control of corruption,” reads the section on Bulgaria.

The expectations for 2023 - with the stipulation that the war causes rapid corrections of all forecasts, and mostly in a negative way - is for the growth of the Bulgarian economy by 4.3%. For 2024, when the country is expected to become a member of the Eurozone, the forecast is for growth of 3.7%.

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