Economic Chaos in Bulgaria: How Political Turmoil is Crushing Eurozone Ambitions

Bulgaria's economy is navigating through political turbulence and the likelihood of new early elections, with many analysts suggesting it is largely operating on autopilot. This situation is driven by regional and Western economic trends, according to an analysis from ING's analytical unit, "ING Think," titled "An economy coasting through the political saga."

Despite meeting almost all criteria for Eurozone membership, Bulgaria is unlikely to join the currency union before January 1, 2026, due to its unstable political climate. The current predictions by ING indicate that Bulgaria will not achieve Eurozone membership until then.

The Bulgarian economy experienced a significant slowdown in growth in 2023, falling to 1.8%. Although it showed a slight improvement to 1.9% in the first quarter of this year, the forecast for 2024 is a cautious increase to 2.6%. This anticipated growth is supported by strong private consumption, but negative foreign trade balance and uncertain investment pace may dampen overall economic output.

Earlier predictions by ING Think suggested a higher growth rate of 2.9% for 2024, with a projected growth of 3.3% for 2025. The Bulgarian National Bank’s recent forecast aligns closely, predicting a 2.1% growth for 2024 and 3.2% for 2025. The European Commission’s mid-May forecast also estimated a 1.9% growth for 2023 and a 2.9% growth for 2025.

The impact of private consumption is expected to persist, bolstered by significant wage increases. However, investment and reforms are anticipated to lag, which could further delay Bulgaria's Eurozone ambitions. The current political impasse may also postpone investment projects and the disbursement of EU funds.

This year’s budget has introduced a detailed investment program, allocating specific funds and assigning government bodies to oversee projects. This increased transparency might help mitigate some negative effects of ongoing political instability on investments and reforms.

Bulgaria's trade deficit is likely to worsen as domestic demand exceeds export capacity, though regional projects such as the Vertical Gas Corridor and NATO infrastructure are expected to improve the trade balance and attract foreign investment in the medium term.

Inflation in Bulgaria is projected to rise slightly, reaching up to 3% annually and remaining at this level into 2025. The increase is attributed to the recent VAT cut removals and rising retail sales. The inflation rate for services is expected to rise due to the removal of VAT reductions for restaurants and catering services from December 31, 2024. Food inflation might also see a rise due to the food trade deficit, while wage growth could keep service inflation above target levels until at least 2026.

On the fiscal front, the budget deficit is expected to stay within the Maastricht criteria of up to 3% of GDP. A rise in capital spending in the latter half of 2024 could be a positive development following a weaker performance in the first half. The unemployment rate fell to 5.3% in June, indicating a tightening labor market, influenced by demographic factors.

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