The Bulgarian economy is likely to shrink 6.3 percent this year and the new government will announce spending cuts next week to avoid an end-year deficit, Finance Minister Simeon Djankov said on Wednesday.

Economists have warned that a spending spree of the previous Socialist-led government before July 5 general elections threaten to cause a deficit after years of surpluses that may put pressure on Bulgaria's currency peg to the euro.

The European Union member has been hit hard by the global crisis with foreign investors fleeing, exports plunging and budget revenues falling. Analysts see the economy contracting by 5-7 percent this year.

'The latest forecast of the finance ministry shows there will be an economic contraction of 6.3 percent this year,' Djankov told reporters after the new centre-right cabinet of Prime Minister Boiko Borisov held its first meeting.

Djankov, a former World Bank economist, said the budget situation was worse than expected and the government would announce spending cuts and measures to raise revenues next week to achieve a balanced budget.

'The situation we have inherited is much worse than what the previous government has said,' he said. 'It is necessary to fill a gap of 2.5 billion levs ($1.81 billion) so that we can achieve a balanced budget'.

He said half of the gap would be covered by spending cuts and the other half would be compensated by additional revenues.

Budget revenues were 16 percent lower than the budgeted amount for the first six months of the year, he said. Sofia still registered a small surplus at end-June.

Many analysts believe that Bulgaria will be the next in line to seek aid from the International Monetary Fund after Latvia, Hungary and Romania.

But Djankov has said there was no need to seek external financing immediately and reiterated the new government would wait at least until the beginning of 2010 to see the effects of its budget measures and how the global crisis evolved.

Source: Forbes