IMF urging Sofia to keep tight policy

SOFIA (Reuters) – The International Monetary Fund urged Bulgaria yesterday to keep its fiscal policy tight and speed up structural reforms to limit risks posed by its wide current account deficit. The Fund, whose two-year non-funding agreement with Bulgaria expired in March, said the European Union newcomer should aim for a surplus of 2.3 percent of gross domestic product in 2008, the same as it has pledged to achieve this year. «We don’t see very many signs of softening of overheating pressures… The larger liquidity buffers are to address moderate midterm shocks better,» IMF head of mission to Bulgaria Robert Hagemann told reporters. «In the longer term, the government needs to save for additional spending demands arising from its ageing population.» Bulgaria has pegged its lev to the euro and fiscal policy is its only tool to influence the economy. The Socialist-led government targets budget surpluses of between 1.5 and 2 percent of GDP through 2009 to maintain macroeconomic stability. «The priorities are… to decrease vulnerability of the economy from future unfavorable external developments,» the finance ministry said in a statement following talks with the IMF. Hagemann said the 2007 fiscal target looked achievable and could even be outperformed despite fears of decreased tax and custom revenues after Bulgaria’s EU entry this January. The Fund said delayed restructuring in the steel and copper sectors and strong import growth would bloat the current account deficit further to 16.6 percent of GDP this year, up from 15.8 percent in 2006. Hagemann said the country should reform its education system and labor market to become more competitive. «It is increasingly important to find ways of enhancing productivity… The educational system is not delivering all of the skills that employers and investors are looking for,» he said. The IMF said it expected economic growth to stay healthy at around 6 percent this year and next, from a real 6.1 percent growth in 2006, driven by strong domestic demand. It sees end-2007 inflation easing to 4.4 percent and averaging 4.6 percent over 2007 due to cheaper food imports from the EU and a high base last year. Inflation accelerated to 6.5 percent in 2006.