The IMF gives a high mark for the prudent policies the Bulgarian authorities has pursued in the

recent years but warned that heavy reliance on foreign capital has made the country vulnerable and the boom has come to an end. This emerges in the report the IMF put out late on Tuesday

after the latest round of Article IV consultations between Bulgaria and the Fund.

The IMF Executive Board say that Bulgaria has built strong balance sheets in the public sector including large foreign reserves, low public debt, and a substantial Fiscal Reserve Account. They note that there are substantial buffers in the banking system.

But looking forward, the Fund considers that economic growth "would slow sharply with the downturn in partner countries and only modest net capital inflows". "Bulgaria has been hit by the global financial crisis, with clear signs that the country's capital-inflows driven boom has come to an end and that the real economy is slowing down."

"Moreover, as risks are predominantly on the downside, the authorities were advised to monitor developments closely and adapt policies,", the report says.

Also, the IMF staff found the real effective exchange rate of the Bulgarian lev to be "somewhat overvalued". Sofia was encouraged to avoid "any further erosion in international competitiveness as a result of real wage increases exceeding productivity gains".

The Fund believes that the most immediate policy challenge for Bulgaria is to maintain confidence in the currency board arrangement and in the banking system. "While the banking sector remains well capitalized, liquid, and highly profitable, a severe recession could cause nonperforming loans to increase and bank capital to erode," says the report.

The Fund's Executive Directors welcomed Bulgaria's commitment to maintaining prudent fiscal policies and its intention to maintain a fiscal surplus of 2 per cent of GDP in 2009. They cautioned that if growth is seen to slow more than expected, additional expenditure cuts will be necessary to achieve the surplus target. They believe that the decision to restrict

public spending to 90 percent of the amount budgeted is an effective short-term tool, "but emphasized that prioritization and further spending restraint will be needed to sustain appropriate fiscal surpluses over the medium term".

Further structural reforms are called for to achieve a smooth and speedy economic recovery and achievement of convergence with the European Union.

The Fund welcomes the recent education and labor market reforms to raise productivity and labor market participation rates, and the progress made in reducing administrative burdens for businesses.

Source: BTA