The war in Ukraine is likely to hit Bulgaria's economic growth, speed up inflation and could pose credit risks, the International Monetary Fund said on Friday.
The IMF, which concluded a staff visit to Sofia, sees Bulgaria's growth tentatively near 3% this year, down from an earlier estimate of 4.4%, while inflation was likely to reach double digits in 2022, it said in a statement.
The IMF said the Bulgarian banking sector remains well capitalised and liquid but urged the central bank to watch for a possible increase in credit risk and other spillovers from the war in Ukraine.
"The economic effects of the war will materialize primarily through higher commodity prices, lower trading partners' demand, and the impact of uncertainty on investment, while refugees need to be cared for. High energy dependence from Russia is a significant vulnerability," the Fund said in a statement.
"Growth is tentatively projected near 3 percent this year, while inflation will likely reach double digits."
Bulgaria's finance ministry has already slashed its growth forecast to 2.6% this year and said the consumer price inflation is likely to average 10.4% this year and is preparing measures aimed at limiting inflationary pressures.
The centrist government, which is targeting a fiscal deficit of 4% of GDP this year, plans to review its budget plans in June and the Fund urged it to account for the new needs arising from the war in Ukraine, like food security and support for refugees.
The IMF noted that surging commodity prices, rising interest rates, the impact of decreasing COVID-related support or emerging imbalances on the housing market could increase the credit risk in the small and open economy.
"Supervisors should continue to ensure that banks closely monitor asset quality for possible deterioration and proactively resolve non performing loans, as credit risks may rise," the Fund said.
Bulgaria, which plans to join the euro zone in 2024, needs to speed up structural reforms and combat corruption. A reform of its low flat personal income tax rate could help reduce inequalities in the EU's poorest member state, the Fund said.
(Reporting by Tsvetelia Tsolova; Editing by Kirsten Donovan and David Evans)
