site.btaUPDATED Central Bank Governor: Budget Discipline Is Urgently Needed

Budget discipline is urgently needed both in terms of process and content. The state budget for 2025 will be an indicator of whether Bulgaria is heading in the right direction, Bulgarian National Bank (BNB) Governor and International Monetary Fund (IMF) head for Bulgaria Dimitar Radev told BTA's Ilian Tzvein here on Friday. Radev was in Washington, D.C., to participate in the annual meetings of the World Bank and the IMF.

Commenting on Bulgaria's goal to adopt the euro, Radev said that a reasonable macroeconomic policy is needed with an emphasis on fiscal position discipline and harmonization of the monetary and fiscal conditions in Bulgaria. "In either case, we are talking about a very short horizon and window of opportunities that should not be missed," he added. Otherwise, if the adoption of the euro gets postponed, there is a risk of Bulgaria's credit rating being lowered and worsening of the conditions for financing the Bulgarian economy, which is explicitly underscored by rating agencies.

“When the budget is loose with chronic deficits, those are billions of leva that, in the end, will have to be paid by businesses and households,” Radev noted. 

In his words, Bulgaria is the only country which is a member of the Banking Union without being part of the eurozone. In that respect, the support in banking circles for Bulgaria’s accession remains strong and constructive. 

Regarding the IMF’s revised forecast for Bulgarian economy’s growth to 2.3% from 2.7% in spring, Radev said that there is no qualitative difference between the new forecast and that of the BNB, published earlier this year. “Given the internal and external challenges, a GDP growth of over 2% can be considered a relatively positive development,” the BNB Governor commented.

Loans to businesses and households are a key factor in maintaining economic activity. What the central bank is doing is calibrate its measures to achieve the targets of its macroprudential policy without stagnating loans and, consequently, the economic activity, Radev explained.

Asked about the effects of the new compulsory limits for banks on mortgage loan indices, introduced by the BNB in early September,  Radev said that the goal of those measures is not to make lending more difficult but to create a reliable framework for supervision and management of potential risks in the banking system. In his words, the latest measures are the BNB practically activating the full set of macroprudential tools at a central bank’s disposal.

According to Radev, there are two trends – a positive and a negative one - at this year’s meetings of the IMF and the World Bank in Washington, D.C. The positive trend is the decrease of inflation, and the negative trend is the continuing lack of fiscal discipline. These trends are clear to see in Bulgaria as well. 

Following is the full text of the interview:

In its latest World Economic Outlook, the IMF reduced its forecast for the Bulgarian economy’s growth to 2.3%, while in spring the growth was forecast at 2.7%. What are your expectations?

There is no qualitative difference between the IMF’s new forecast for Bulgarian economic growth in 2024 and the BNB’s forecast published earlier this year. Given the internal and external challenges, a GDP growth of over 2% can be considered a relatively positive development.

What are the options before the BNB if the economy slows down further than expected?

Loans to businesses and households are a key factor in keeping the economic activity positive. What the BNB is doing is to calibrate its measures to achieve the targets of its macroprudential policy without stagnating loans and, consequently, the economic activity.  

During the talks in Washingon, D.C., within the annual meetings of the IMF and the World Bank, do you receive support by counterparts of yours for Bulgaria joining the eurozone? 

Bulgaria is the only country that is a member of the European Banking Union without being a member of the eurozone. In this respect, the support in the banking circles remains strong and constructive. 

When do you think that Bulgaria will meet the inflation criterion, which has been determined as the only one the country does not meet in order to join the eurozone?

The answer should be sought along the lines of conducting a reasonable macroeconomic policy with an emphasis on urgent fiscal position discipline and harmonization of the monetary and fiscal conditions in the country. In either case, we talk about a very short horizon and window of opportunities that should not be missed.

We find ourselves in a period where the state budget for next year is about to be presented. Do you see any risks in that direction that could affect the process of joining the eurozone? 

That is what I am talking about: urgent budget discipline both in terms of process and content. Next year’s budget will be an indicator of whether we are heading in the right direction.

Do you think there are risks for the economy, as some rating agencies forecast, that could become a reality if the adoption of the euro gets postponed? 

The risk that credit agencies explicitly underscore, lies in the lowering of the country’s credit rating and worsening of the conditions for financing our economy. When the budget is loose with chronic deficits, those are billions of leva that, in the end, will have to be paid by businesses and households. 

Do you expect the new criteria to make it more difficult to grant new mortgage loans, and do you already observe their effects on the real estate market?

The aim of these measures is not to make lending more difficult, which, as I said at the beginning, is an important factor for economic activity in the country, but to create a reliable framework for supervising and managing potential risks in the banking system. With these latest measures, we have, in effect, activated the full range of macroprudential tools available to a central bank.

What is the general expectation that you felt during the meetings about the development of the global economy and, in particular, that of the euro area and the EU?

Two trends stand out, one positive and one negative. The positive one is the reduction in inflation, and the negative one is the continued lack of fiscal discipline, which is increasing the debt burden. These trends also have clear projections in our country.