Bulgaria has little room to ease fiscal policy, says IMF

WASHINGTON (Reuters) – The International Monetary Fund said on Thursday there was little room for EU aspirant Bulgaria to relax fiscal policy, with the country’s current account gap likely to remain high over the near term. In comments at the end of the third review of Bulgaria’s 25-month IMF standby loan agreement, the fund said strong private domestic demand, buoyed by rapid credit growth, had contributed to rising inflation and a «substantial deterioration» of the current account deficit. With its central bank restricted by a currency board pegging its lev to the euro, Bulgaria depends on fiscal policy to counter external risks arising from the large current account gap and runs one of the tightest state budgets in Europe. «Taking into account the negative budgetary impact of financial flows upon EU accession and the ensuing additional demand pressures, the budget in 2007 should aim to achieve a surplus of 2 percent of GDP,» the IMF said in a statement. To reach this target, the IMF said, the country should compensate accession-related spending increases by offsetting cuts in existing programs and projects. Postponing further tax cuts until they are more affordable is also important, it added. The IMF agreed to extend the $148.4 million loan agreement with the IMF to March 31, 2007. The Bulgarian authorities have not drawn down on the loan, which they have treated as precautionary.

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