Mapping Bulgaria's Future : Inclusive Growth and Productive Jobs

Abstract

The newly elected government takes
 office at a time of stark economic challenges. The outfall
 of the global economic crisis threatens to undo many of the
 achievements of the recent past, derail convergence with the
 European Union (EU), and heighten social vulnerability. The
 election of a strong government offers a timely opportunity
 to restore and broaden the economic reform agenda which had
 been initiated before EU accession and but lost some
 momentum since 2007. Decisive action could shorten the
 length and reduce the depth of the crisis by restoring
 market confidence and improving economic prospects.
 Restoring the health of the economy and returning to the
 convergence path requires concerted policy actions to unwind
 economic imbalances and advance much needed structural
 reforms. The two-way policy response would aim to: 1) bring
 about fiscal consolidation and restructure public finances,
 strengthen financial stability, and mitigate the social
 impact of the crisis in the short-run; 2) and step up
 structural reform to address deep seated economic problems
 which both magnify the impact of the international crisis
 and hamper longer-term convergence prospects in the
 medium-run. The World Bank stands ready to support the
 structural transformation of Bulgaria. The Government is
 strongly committed to maintaining the currency board with
 the euro adoption as an exit strategy. Yet, a continued
 worsening in private and public sector balance sheets could
 trigger a loss of confidence in the currency board. As
 international investors take a closer look at the
 vulnerabilities of emerging economies, there is a large
 premium on strong domestic policies. While financial markets
 may have under-priced the risks relative to the fundamentals
 in Bulgaria and other countries in the region prior to the
 crisis, this under-pricing has now disappeared. The pendulum
 is now likely to swing into the opposite direction.