Bulgaria Faces Fiscal Warning as Deficit Grows, Growth Slows and Inflation Risks Rise

Finance officials and the Bulgarian National Bank have issued a series of warnings about Bulgaria’s fiscal and economic outlook for 2026, highlighting rising pressure on public finances, slower growth, and higher inflation.

Speaking at an American Chamber of Commerce event in Bulgaria dedicated to the country’s economic prospects for 2026, Acting Finance Minister Georgi Klisurski said that whoever prepares the next state budget will face “difficult decisions” involving cuts to public spending and administration. He stressed that maintaining fiscal stability will require reforms and a reassessment of state structures, including questions over the size and efficiency of the public sector.

Klisurski also noted that the budget is currently operating “on autopilot” in the absence of a regular 2026 fiscal plan, warning that the current trajectory is not favorable. He indicated that difficult choices will be needed to preserve Bulgaria’s position as a country with relatively low deficit and debt levels in Europe, though he did not clarify whether his team is actively drafting specific measures.

His remarks came shortly after the Finance Ministry reported a budget deficit of 1.5 billion euros in the first quarter of the year, equivalent to 1.2% of GDP. Bulgaria is still operating under an extended budget framework based on the 2025 budget, as no regular 2026 budget has been adopted. The temporary arrangement was first extended until the end of March and later prolonged again by parliament until a new government is formed following elections.

The current fiscal situation follows political turmoil triggered by a previous 2026 draft budget, which was introduced by a coalition government including GERB, BSP, TISP, and DPS. The proposals sparked large-scale protests over perceived imbalances between public and private sector burdens. The government subsequently resigned, and a caretaker cabinet led by Andrey Gyurov took over, while a regular budget was never approved.

In parallel, Bulgarian National Bank Governor Dimitar Radev warned that the country’s economic growth could slow to around 3% in 2026, while inflation may rise to approximately 3.7%. He presented these projections during the same economic forum, outlining multiple scenarios for Bulgaria’s development, including adverse and severe cases.

In the baseline outlook, Radev said growth would weaken and inflation would remain elevated due to external and internal pressures, including higher energy prices linked to the ongoing Middle East conflict and rising domestic service-sector costs. In a more negative scenario, inflation could remain high for longer while growth slows more sharply, while in the most severe case, broader economic shocks could lead to declines in costs, wages, and prices.

According to the central bank governor, Bulgaria is currently moving closer to the unfavorable scenario, with reduced fiscal space limiting the government’s ability to implement large-scale support measures. He called for consistency and discipline in fiscal policy to better manage the economic risks.

At the same time, Deputy Prime Minister Maria Nedina announced that Bulgaria has submitted a request for the fourth payment under the EU Recovery and Resilience Plan, worth up to 900 million euros, with expected disbursement by the end of June. However, Klisurski warned that part of the funds could be at risk because parliament did not adopt all required reforms linked to the payment.

Additional complications have emerged after parliamentary decisions affecting energy sector restructuring, including restrictions on reforms within the Bulgarian Energy Holding. Some of these changes are tied to conditions set by the European Commission for previous tranches of funding.

The Ministry of Finance’s spring macroeconomic forecast further confirmed a weaker outlook, projecting average annual inflation of 4.3% this year and a year-end inflation rate of 5.2% in 2026, alongside GDP growth slowing to 2.6%. The ministry revised earlier projections upward for inflation and downward for growth, citing the economic impact of military developments in the Middle East.

A key factor in the revised forecast is the disruption of global trade routes and energy markets, particularly the Strait of Hormuz, which has affected oil and gas prices. The ministry warned that continued instability could further increase inflation and reduce growth compared to previous expectations.

An alternative simulation scenario also assessed the impact of sustained higher energy prices, including Brent crude above 100 dollars per barrel and significantly higher European gas prices. Under this scenario, inflation in Bulgaria could rise by an additional percentage point in 2026, while economic growth could be 0.2 percentage points lower than the baseline projection.