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KOM (2025) 0303
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EUROPEAN

COMMISSION

Brussels, 4.6.2025

SWD(2025) 154 final/2

DOWNGRADED ON 4.6.2025

COMMISSION STAFF WORKING DOCUMENT

CONVERGENCE REPORT 2025 on Bulgaria

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND

THE COUNCIL

CONVERGENCE REPORT 2025 on Bulgaria

(prepared in accordance with Article 140(1) of the Treaty on the Functioning of the

European Union)

{COM(2025) 303 final}

kom (2025) 0303 - Ingen titel

European Commission

Directorate-General for Economic and Financial Affairs

Convergence Report 2025 on Bulgaria

EUROPEAN ECONOMY

Institutional Paper XXX

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ABBREVIATIONS

Member States

Bulgaria

Euro area

EA-20 Euro area, 20 Member States

EA-19 Euro area, 19 Member States before 2023

EA-18 Euro area, 18 Member States before 2015

EA-17 Euro area, 17 Member States before 2014

EU-28 European Union, 28 Member States

EU-27 European Union, 27 Member States before July 2013 (i.e. EU-28 excl. HR) and from

February 2020 (i.e. EU-28 excl. UK)

EU-25 European Union, 25 Member States before 2007 (i.e. EU-28 excl. BG, RO and HR)

EU-15 European Union, 15 Member States before 2004

Currencies

EUR

BGN

USD

Euro

Bulgarian lev

United States dollar

Central Banks

BNB

Bulgarska narodna banka (Bulgarian National Bank

–

central bank of Bulgaria)

Other abbreviations

AML

Anti-money laundering

AMR

Alert Mechanism Report

BoP

Balance of Payments

CAR

Capital adequacy ratio

CBA

Currency board arrangement

CEE

Central and Eastern Europe

CIT

Corporate Income Tax

CPI

Consumer price index

CR5

Concentration ratio (aggregated market share of five banks with the largest market share)

European Community

ECB

European Central Bank

EDP

Excessive Deficit Procedure

EMU

Economic and monetary union

ERM II Exchange rate mechanism II

ESA

European System of Accounts

ESCB European System of Central Banks

European Union

Eurostat Statistical Office of the European Union

FDI

Foreign direct investment

FGS

Funding for Growth Scheme

FSA

Financial Supervisory Authority

GDP

Gross domestic product

HICP

Harmonised index of consumer prices

IDR

In-Depth Review

MFI

Monetary Financial Institution

MIP

Macroeconomic Imbalance Procedure

NCBs National central banks

NEER Nominal effective exchange rate

NPL

Non-performing loans

Official Journal

iii

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OJL

PIT

PPS

REER

RRF

RRP

SGP

TFEU

ULC

VAT

Official Journal Lex

Personal Income Tax

Purchasing Power Standard

Real effective exchange rate

Recovery and Resilience Facility

Recovery and Resilience Plan

Stability and Growth Pact

Treaty on the Functioning of the European Union

Unit labour costs

Value added tax

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ACKNOWLEDGEMENTS

The Convergence Report and its Technical Annex were prepared in the Directorate-General for

Economic and Financial Affairs. The main contributors were Cvetan Kyulanov, Ivan Lozev,

Benedetta Martinelli, Alina Radut and Adriana Reut.

Other contributors were Cristiana Belu Manescu, Pedro Cardoso, Alessandra Cepparulo, Ben

Deboeck, Valeska Gronert, James Hinton, Ingo Kuhnert, Philipp Mohl, Arian Peric, Lucia Piana, Diana

Radu, Ernesto Reitano and Sara Stoyanova.

Statistical assistance was provided by Grzegorz Janowicz and Jannik Sielmann, and administrative

assistance by Dicle Akbay, Simona State and Emel Yavuz.

The report benefited from comments and suggestions by Declan Costello, Vierke Hauke and

Massimo Suardi.

The report was coordinated by Adriana Reut under the supervision of Eric Ruscher, Head of Unit

and approved by Massimo Suardi, Director, Declan Costello, Deputy Director General, and Maarten

Verwey, Director General.

Questions and comments may be referred to Adriana Reut ([email protected]).

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CONTENTS

Convergence Report 2025 on Bulgaria

Convergence Report 2025 on Bulgaria - Technical annex

Introduction

1.1.

1.2.

ROLE OF THE REPORT

APPLICATION OF THE CRITERIA

1.2.1.

1.2.2.

1.2.3.

1.2.4.

1.2.5.

1.2.6.

Compatibility of legislation

Price stability

Public finances

Exchange rate stability

Long-term interest rates

Additional factors

Bulgaria

2.1.

LEGAL COMPATIBILITY

2.1.1.

2.1.2.

2.1.3.

2.1.4.

2.1.5.

2.2.

Introduction

Central bank independence

Prohibition of monetary financing and privileged access

Integration into the ESCB

Assessment of compatibility

PRICE STABILITY

2.2.1.

2.2.2.

2.2.3.

Respect of the reference value

Recent inflation developments

Underlying factors and sustainability of inflation

2.3.

PUBLIC FINANCES

2.3.1.

2.3.2.

Recent fiscal developments

Medium-term prospects

2.4.

2.5.

2.6.

EXCHANGE RATE STABILITY

LONG-TERM INTEREST RATES

ADDITIONAL FACTORS

2.6.1.

2.6.2.

Developments in the balance of payments

Market integration

2.7.

SUSTAINABILITY OF CONVERGENCE

vii

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LIST OF TABLES

2.1.

2.2.

2.3.

2.4.

2.5.

2.6.

2.7.

Bulgaria - Components of inflation

Bulgaria - Other inflation and cost indicators

Bulgaria - Budgetary developments and projections (as % of GDP

unless indicated otherwise)

Bulgaria - Balance of payments

Bulgaria - Market integration

Bulgaria - Allocation of assets by financial sub-sector

Bulgaria - Financing of the economy1)

LIST OF GRAPHS

2.2.

2.1.

2.3.

2.4.

2.5.

2.6.

2.7.

2.8.

2.9.

2.10.

2.11.

Bulgaria - HICP inflation

Bulgaria - Inflation criterion

Bulgaria - Inflation, productivity and wage trends

Bulgaria - Fiscal stance and its components

Bulgaria - BGN/EUR exchange rate

Bulgaria - Annual effective interest rate spread to 1-M Euribor

Bulgaria - Long-term interest rate criterion

Bulgaria - Long-term interest rates

Bulgaria - Effective exchange rates

Bulgaria - World Bank's 2024 Worldwide Governance Indicators

Bulgaria - Foreign ownership and concentration in the banking

sector

LIST OF BOXES

1.1.

1.2.

1.3.

1.4.

1.5.

Article 140 of the Treaty

Assessment of price stability and the reference value

Excessive Deficit Procedures under the new EU fiscal framework

A reinforced approach to ERM II participation by means of

upfront policy commitments by the applicant Member States

Data for the interest rate convergence

viii

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Convergence Report 2025 on Bulgaria

(prepared in accordance with Article 140(1) of the Treaty)

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Report

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Convergence Report 2025 on Bulgaria

Technical annex

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1.1.

INTRODUCTION

ROLE OF THE REPORT

The euro was introduced on 1 January 1999 by eleven Member States, namely Austria, Belgium,

Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

Subsequently, Greece (2001), Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia

(2011), Latvia (2014), Lithuania (2015) and Croatia (2023) also adopted the euro.

Member States for which the Council has not yet decided that they fulfil the necessary conditions

for the adoption of the euro are referred to as ‘Member States with a derogation’. Article 140 of

the Treaty lays down provisions and procedures for examining the convergence situation of

Member States with a derogation (Box 1.1). At least once every two years, or at the request of a

Member State with a derogation, the Commission and the European Central Bank (ECB) prepare

Convergence Reports for such Member States. Denmark negotiated an opt-out arrangement before

the adoption of the Maastricht Treaty (

) and does not participate in the third stage of EMU. Until

Denmark indicates that it wishes to participate in the third stage and adopt the euro, it will not be

the subject of an assessment as to whether it fulfils the necessary conditions for such a

participation.

In 2024, the Commission and the ECB adopted their latest regular Convergence Reports (

). None

of the Member States assessed in those reports was deemed to meet the necessary conditions for

adopting the euro.

On 25 February 2025, Bulgaria submitted a request for a convergence assessment. This

Commission Staff Working Document is a Technical Annex to the Convergence Report 2025 on

Bulgaria and includes a detailed assessment of the progress with convergence, as required by

Article 140(1) of the Treaty.

The convergence assessment in this report is presented against the background of several major

economic and policy developments. Following the EU’s weak economic performance in 2023, when

GDP grew by 0.4%, the economy returned to moderate growth of 1.0% in 2024, with stronger

momentum at the end of the year. In 2024, private consumption was supported by continued

growth in real wages and higher employment, with a remarkably strong labour market. The

disinflationary process that started towards the end of 2022 continued to progress throughout

much of 2024, with EU headline inflation averaging 2.6% that year, and is expected to continue in

2025. Inflation divergence across the EU Member States also narrowed significantly in 2024. With

the disinflation process well on track, in April 2025 the ECB cut its main policy rate for the seventh

time since June 2024, to 2.25%.

The

economic outlook, including the Commission’s

2025 Spring Economic Forecast for HICP

inflation for the EU as a whole and for individual Member States, is characterised by an unusually

high degree of uncertainty. In early 2025, the EU and global economies were hit by the most

significant policy-induced trade and economic uncertainty shock in decades. It is unclear what the

landing zone for the US tariffs vis-à-vis trading partners would be, which forces the Commission

forecast to rely on several technical assumptions (

). Beyond trade, broader geopolitical tensions

remain elevated, heightening uncertainty risks, weighing on confidence, and posing significant risks

to the economic outlook.

The expected acceleration in implementing the recovery and resilience plans (RRPs) and the

cohesion policy programmes can at least partly offset the negative consequences of the weaker

(

) Protocol (No 16) on certain provisions relating to Denmark.

(

) European Commission, Convergence Report 2024, COM(2024) 270 final, 26 June 2024; European Central Bank,

Convergence Report 2024, June 2024.

( )

Significantly, the individualised ‘reciprocal’ higher tariffs are

assumed to not be reinstated at the expiry of the 90 days

suspension. The forecast also assumes that the exceptionally high tariffs on Chinese imports, imposed after April 2, will

be scaled back to pre-escalation levels, as they are deemed unsustainable. By the time the Commission forecast was

published, on 19 May 2025, the new tariffs in place were lower than those assumed at the cut-off date.

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Convergence Report 2025 on Bulgaria - Technical annex

Chapter 1 - Introduction

Box 1.1:

Article 140 of the Treaty

‘1.

At least once every two years, or at the request of a Member State with a derogation, the

Commission and the European Central Bank shall report to the Council on the progress made by the

Member States with a derogation in fulfilling their obligations regarding the achievement of economic

and monetary union. These reports shall include an examination of the compatibility between the

national legislation of each of these Member States, including the statutes of its national central bank,

and Articles 130 and 131 and the Statute of the ESCB and of the ECB. The reports shall also examine

the achievement of a high degree of sustainable convergence by reference to the fulfilment by each

Member State of the following criteria:

—

the achievement of a high degree of price stability; this will be apparent from a rate of inflation

which is close to that of, at most, the three best performing Member States in terms of price stability,

—

the sustainability of the government financial position; this will be apparent from having achieved

a government budgetary position without a deficit that is excessive as determined in accordance with

Article 126(6),

—

the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of

the European Monetary System, for at least two years, without devaluing against the euro,

—

the durability of convergence achieved by the Member State with a derogation and of its

participation in the exchange-rate mechanism being reflected in the long-term interest-rate levels.

The four criteria mentioned in this paragraph and the relevant periods over which they are to be

respected are developed further in a Protocol annexed to the Treaties. The reports of the Commission

and the European Central Bank shall also take account of the results of the integration of markets, the

situation and development of the balances of payments on current account and an examination of the

development of unit labour costs and other price indices.

2. After consulting the European Parliament and after discussion in the European Council, the Council

shall, on a proposal from the Commission, decide which Member States with a derogation fulfil the

necessary conditions on the basis of the criteria set out in paragraph 1, and abrogate the derogations

of the Member States concerned.

The Council shall act having received a recommendation of a qualified majority of those among its

members representing Member States whose currency is the euro. These members shall act within six

months of the Council receiving the Commission's proposal.

The qualified majority of the said members, as referred to in the second subparagraph, shall be defined

in accordance with Article 238(3)(a).

3. If it is decided, in accordance with the procedure set out in paragraph 2, to abrogate a derogation,

the Council shall, acting with the unanimity of the Member States whose currency is the euro and the

Member State concerned, on a proposal from the Commission and after consulting the European

Central Bank, irrevocably fix the rate at which the euro shall be substituted for the currency of the

Member State concerned, and take the other measures necessary for the introduction of the euro as

the single currency in the Member State concerned.’

international environment and play a crucial role in the convergence process of non-euro area EU

Member States. Besides contributing to higher growth and improved public finances in the near

term, the Recovery and Resilience Facility (RRF) and cohesion policy programmes strengthen

Member States’ long-term

growth and resilience by supporting major reforms and investments

that help address both long-standing and new challenges, such as diversifying energy supplies. The

overall implementation of the RRPs progressed in 2024 and in the first four months of 2025. By

the end of 2024, RRF disbursements reached EUR 306 billion, which is close to half of the total

amount of support committed under the RRF. However, in a few Member States, including Bulgaria,

there are significant delays in the RRF implementation. In addition, EU Cohesion Policy funds

provide EUR 378 billion to Member States for the 2021-2027 period. Cohesion policy concentrates

in fields that are critical for promoting convergence and competitiveness through long-term

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Convergence Report 2025 on Bulgaria - Technical annex

Chapter 1 - Introduction

investment in line with EU priorities and will support EU GDP growth, with a particularly high

impact in the Member States and regions that are the main beneficiaries of the policy.

In November 2024, the Commission launched the first implementation cycle of the reformed

economic governance framework that entered into force on 30 April 2024. The main objectives of

the new framework are to strengthen Member States’ debt sustainability and promote sustainable

and inclusive growth in all Member States through growth-enhancing reforms and priority

investments. At the centre of the new framework are the national medium-term fiscal-structural

plans, which set the Member States’ fiscal paths, defined in terms of net expenditure growth rates.

The plans contain priority reforms and investments and cover an adjustment period of four years

as a rule. An extended adjustment period (up to seven years) can be agreed at the request of the

Member State which commits to additional reforms and investments that are conducive to

economic growth and fiscal sustainability. Bulgaria submitted its four-year national medium-term

fiscal-structural plan on 27 February 2025. On 12 May 2025, the Commission recommended to

the Council to endorse

Bulgaria’s plan.

On 19 March 2025, the Commission presented, as part of the ReArm Europe Plan/Readiness 2030,

an ambitious defence package providing financial levers to EU Member States to drive an

investment surge in defence capabilities. As part of this plan, the Commission invited Member

States to apply for the activation of the national escape clause (NEC) of the Stability and Growth

Pact, which will provide them additional budgetary space to transition to a durably higher level of

defence expenditure, within the EU fiscal rules. The amount of the planned deviation under the

escape clause will be capped at 1.5% GDP, available for a period of four years. A new dedicated

instrument - Security Action for Europe (SAFE) - has been established, with the Commission

planning to raise up to EUR 150 billion on the capital markets to help EU Member States quickly

and substantially

increase investments in Europe’s defence capabilities. Bulgaria submitted a

request, to the Council and the Commission, to activate the NEC. On 4 June 2025, the Commission

recommended to the Council to activate the NEC for Bulgaria, allowing the country to deviate from,

and exceed, the net expenditure path that will be set in the Council recommendation endorsing its

medium-term fiscal plan.

On 4 June 2025, the Commission published its European Semester Spring 2025 package. To drive

long-term prosperity and resilience, the EU is aligning its economic governance with a renewed

focus on competitiveness as presented in the Competitiveness Compass. Through its country-

specific recommendations, the European Semester reflects the new priorities to boost

competitiveness and provides guidance, including to Bulgaria, on the necessary reforms and

investments at national and regional level. As part of the European Semester Spring 2025

package, the Commission recommends that Bulgaria adheres to the maximum growth rates of net

expenditure in its plan, while making use of the allowance under the NEC for higher defence

expenditure.

The remainder of the first chapter presents the methodology used for the application of the

assessment criteria. Chapters 2 to 7 examine the fulfilment of the convergence criteria and other

requirements in the order in which they appear in Article 140(1) (see Box 1.1). The cut-off date for

the statistical data included in this convergence report was 19 May 2025.

1.2.

APPLICATION OF THE CRITERIA

In accordance with Article 140(1) of the Treaty, the Convergence Reports shall examine the

compatibility of national legislation with Articles 130 and 131 of the Treaty and the Statute of the

European System of Central Banks (ESCB) and of the European Central Bank. The reports shall also

examine the achievement of a high degree of sustainable convergence by reference to the

fulfilment of the four convergence criteria dealing with price stability, public finances, exchange

rate stability and long-term interest rates as well as some additional factors. The four convergence

criteria are developed further in a Protocol annexed to the Treaty (Protocol No 13 on the

convergence criteria).

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Convergence Report 2025 on Bulgaria - Technical annex

Chapter 1 - Introduction

1.2.1. Compatibility of legislation

In accordance with Article 140(1) of the Treaty, the legal examination includes an assessment of

compatibility between

a Member State’s legislation, including the statute of its national central

bank, and Article 130 and 131 of the Treaty. This assessment mainly covers three areas.

•

First, the independence of the national central bank and of the members of its decision-making

bodies, as laid down in Article 130, must be assessed. This assessment covers all issues linked

to a national central bank’s institutional and financial independence and to the personal

independence of the members of its decision-making bodies.

•

Second, in accordance with Articles 123 and 124 of the Treaty, the compliance of the national

legislation is verified against the prohibition of monetary financing and privileged access. The

prohibition of monetary financing is laid down in Article 123(1) of the Treaty, which prohibits

overdraft facilities or any other type of credit facility with the ECB or the central banks of

Member States in favour of Union institutions, bodies, offices or agencies, central governments,

regional, local or other public authorities, other bodies governed by public law, or public

undertakings of Member States; and the purchase directly from these public sector entities by

the ECB or central banks of debt instruments. As regards the prohibition on privileged access as

set out in Article 124, the central banks, as public authorities, may not take measures granting

privileged access by the public sector to financial institutions if such measures are not based

on prudential considerations.

•

Third, in accordance with Article 131, the integration of the national central bank into the ESCB

has to be examined, in order to ensure that at the latest by the moment of euro adoption, the

objectives of the national central bank are compatible with the objectives of the ESCB as

formulated in Article 127 of the Treaty. The national provisions on the tasks of the national

central bank are assessed against the relevant rules of the Treaty and the ESCB/ECB Statute.

1.2.2. Price stability

The price stability criterion is defined in the first

indent of Article 140(1) of the Treaty: ‘the

achievement of a high degree of price stability; this will be apparent from a rate of inflation which

is close to that of, at most, the three best performing Member States in terms of price stability’.

Article

1 of the Protocol on the convergence criteria further stipulates that ‘the criterion on price

stability […] shall mean that a Member State has a price performance that is sustainable and an

average rate of inflation, observed over a period of one year before the examination, that does not

exceed by more than 1.5 percentage points that of, at most, the three best performing Member

States in terms of price stability. Inflation shall be measured by means of the consumer price index

on a comparable basis, taking into account differences in national definitions.

Since national consumer price indices (CPIs) diverge substantially in terms of concepts, methods

and practices, they do not constitute the appropriate means to meet the Treaty requirement that

inflation must be measured on a comparable basis. To this end, the Council adopted on 23 October

1995 a framework regulation (

) setting the legal basis for the establishment of a harmonised

methodology for compiling consumer price indices in the Member States. This process resulted in

the production of the Harmonised Indices of Consumer Prices (HICPs), which are used for assessing

the fulfilment of the price stability criterion.

(

) Council Regulation (EC) No 2494/95 of 23 October 1995 concerning harmonised indices of consumer prices (OJ L 257,

27.10.1995, pp. 1-4), amended by Regulations (EC) No 1882/2003 and No 596/2009 of the European Parliament and

of the Council, and repealed by Regulation (EU) 2016/792 of the European Parliament and of the Council.

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Chapter 1 - Introduction

Box 1.2:

Assessment of price stability and the reference value

The numerical part of the price stability criterion implies a comparison between a Member State's

average price performance and a reference value.

A Member State’s

average rate of inflation

is measured by the percentage change in the unweighted

average of the last 12 monthly indices relative to the unweighted average of the 12 monthly indices of

the previous period, rounded to one decimal. This measure captures inflation trends over a period of

one year as requested by the provisions of the Treaty. Using the commonly used inflation rate

–

calculated as the percentage change in the consumer price index of the latest month over the index for

the equivalent month of the previous year

–

would not meet the one-year requirement. The latter may

also be excessively volatile from month to month and excessively affected by temporary factors.

The

reference value

is calculated as the unweighted average of the average rates of inflation of, at

most, the three best-performing Member States in terms of price stability plus 1.5 percentage points.

The outcome is rounded to one decimal. While in principle the reference value could also be calculated

on the basis of the price performance of only one or two best performing Member States in terms of

price stability, it has been existing practice to select the three best performers. Defining the reference

value in a relative way (as opposed to a fixed reference value) allows taking into account the effects of

a common shock that affects inflation rates across all Member States.

Table 1:

Inflation reference value in previous and current convergence reports

Convergence Report

adoption date

1998

2000

2002

2004

2006 May

2006 December

2007

2008

2010

2012

2013

2014

2016

2018

2020

2022

2024

2025

January 1998

March 2000

April 2002

August 2004

March 2006

October 2006

March 2007

March 2008

March 2010

March 2012

April 2013

April 2014

April 2016

March 2018

March 2020

April 2022

May 2024

April 2025

Cut-off month

Three best

performers

1) 2)

Reference

value

2.7

2.4

3.3

2.4

2.6

2.8

3.0

3.2

1.0

3.1

2.7

1.7

0.7

1.9

1.8

4.9

4.1

2.8

Euro area average

inflation rate

1.5

1.4

2.4

2.1

2.3

2.2

2.1

2.5

0.3

2.8

2.2

1.0

0.1

1.4

1.1

4.4

3.4

2.3

Austria, France, Ireland

Sweden, France, Austria

United Kingdom, France, Luxembourg

Finland, Denmark, Sweden

Sweden, Finland, Poland

Poland, Finland, Sweden

Finland, Poland, Sweden

Malta, Netherlands, Denmark

Portugal, Estonia, Belgium

Sweden, Ireland, Slovenia

Sweden, Latvia, Ireland

Latvia, Portugal, Ireland

Bulgaria, Slovenia, Spain

Cyprus, Ireland, Finland

Portugal, Cyprus, Italy

France, Finland, Greece

Netherlands, Italy, Latvia

Ireland, Finland, Italy

1) EU15 until April 2004; EU25 between May 2004 and December 2006; EU27 between January 2007 and June 2013; EU28 between July 2013 and January 2020;

EU27 (without UK) from February 2020 onwards.

2) In case of equal rounded average inflation for several potential best performers, the ranking is determined on the basis of unrounded data.

3) Reference values are only computed at the time of Convergence Reports. All calculations of the reference value between the Convergence Reports are purely

illustrative.

4) Measured by the percentage change in the arthmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices of

the previous period.

5) Based on revised data, Germany would replace Luxembourg as one of the three Member States with the lowest 12-month average inflation in April 2002.

This change would not affect the price and long-term interest rate reference values in April 2002.

Sources: Eurostat and European Commission calculations.

As Article 140(1) of the Treaty refers to

‘Member

States’ and does not make a distinction between euro

area and other Member States, the convergence reports select the three best performers from all

Member States

–

EU-15 for the convergence reports before 2004, EU-25 for the reports between 2004

(Continued on the next page)

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Chapter 1 - Introduction

Box (continued)

and 2006, EU-27 for reports between 2007 and 2013, EU-28 for reports between 2014 and 2018 and

EU-27 for the reports between 2020 and 2024.

The notion of

‘best

performer in terms of price stability’

is not defined explicitly in the

Treaty. It is appropriate to interpret this notion in a non-mechanical manner, taking into

account the state of the economic environment and country-specific factors at the time of

the assessment. In particular, a

n outlier analysis should be performed to identify those countries

whose inflation rates cannot be seen as meaningful benchmarks.

These outliers are identified on

the basis of two criteria taken in combination: i) an inflation rate substantially below the euro

area average; and ii) an inflation rate driven by country-specific factors that cannot be seen

as representative of the process that is driving inflation in the euro area. In this convergence

report, no Member States were identified as outliers in terms of inflation performance for the

calculation of the reference value, as none of their inflation rates deviated by a wide margin

from the euro area average due to country-specific circumstances (

(

) For more details on past outlier analyses, see Box 1.2 on page 29 of the

European Commission’s 2024

Convergence Report (https://economy-finance.ec.europa.eu/publications/convergence-report-2024_en).

As has been the case in past convergence reports, a Member State’s average rate of inflation is

measured by the percentage change in the arithmetic average of the last 12 monthly indices

relative to the arithmetic average of the 12 monthly indices of the previous period. The reference

value is calculated as the arithmetic average of the average rate of inflation of the three ‘best-

performing EU Member States in terms of price stability’ plus 1.5 percentage points (see Box

1.2).

Accordingly, the reference value is currently 2.8%, based on the data of Ireland (1.2%), Finland

(1.3%) and Italy (1.4%) over the 12-month period covering May 2024

–

April 2025. No Member

States were identified as outliers in terms of inflation performance for the calculation of the

reference value, as none of their inflation rates deviated by a wide margin from the euro area

average due to country-specific circumstances (see Box 1.2).

The Protocol on the convergence criteria not only requires Member States to have achieved a high

degree of price stability but also calls for a price performance that is sustainable. The requirement

of sustainability aims at ensuring that the degree of price stability and inflation convergence

achieved in previous years will be maintained after adoption of the euro. This deserves particular

attention as sustained divergences in price developments in one or more euro area Member States

can lead to the emergence of competitiveness losses that must be corrected via painful

adjustment processes and can trigger negative spillover effects on other Member States.

Inflation sustainability implies that the satisfactory inflation performance must essentially be due

to the adequate behaviour of input costs and other factors that influence price developments in a

structural manner, rather than reflecting the influence of cyclical or temporary factors. Therefore,

this Technical Annex also takes account of the role of the macroeconomic situation and cyclical

position in the inflation performance, of developments in unit labour costs as a result of trends in

labour productivity and nominal compensation per head, and of developments in import prices to

assess how external price developments have impacted on domestic inflation. Similarly, the impact

of administered prices and indirect taxes on headline inflation is also considered.

From a forward-looking perspective, the report includes an assessment of medium-term prospects

for price developments. The analysis of factors that have an impact on the inflation outlook is

complemented by the projections from the most recent Commission inflation forecast. Medium-

term inflation prospects are also assessed by reference to the economies’ key structural

characteristics, including the functioning of the labour and product markets.

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1.2.3. Public finances

The convergence criterion dealing with the government budgetary position is defined in the second

indent of Article 140(1) of the Treaty as ‘the sustainability of the government financial position;

this will be apparent from having achieved a government budgetary position without a deficit that

is excessive as determined in accordance with Article 126(6)’. Furthermore, Article 2 of the Protocol

on the convergence criteria states that this criterion means that ‘at the time of the examination

the Member State is not the subject of a Council decision under Article 126(6) of the said Treaty

that an excessive deficit exists’.

The convergence assessment in the budgetary area is thus directly linked to the excessive deficit

procedure which is specified in Article 126 of the Treaty and further clarified in the Stability and

Growth Pact (see Box 1.3 for further information on the excessive deficit procedure as

strengthened by the 2024 reform of the Stability and Growth Pact). The details of the excessive

deficit procedure are defined in Regulation 1467/97 as amended in 2024 which sets out the way

in which government deficit and debt levels are assessed to determine whether an excessive

deficit exists, under Article 126 of TFEU. The convergence assessment of the budgetary position is

therefore judged by whether the Member State is subject to a Council decision under 126(6) on the

existence of an excessive deficit (

On 4 June 2025, the Commission adopted a report under Article 126(3) of the TFEU for 4 Member

States. The report did not cover Bulgaria, as its government deficit in 2024 did not exceed 3.0% of

GDP.

In the context of the European Semester, the country-specific recommendations for 2025 invite

Member States to reinforce overall defence spending and readiness in line with the European

Council conclusions of 6 March 2025. Member States are called to adhere to the maximum growth

rates of net expenditure recommended by the Council, while - where relevant - making use of the

allowance under the national escape clause for higher defence expenditure.

(

) The definitions of the government deficit and debt used in this report are in accordance with the excessive deficit

procedure, as was the case in previous convergence reports. These definitions are laid out in the amended Council

Regulation (EC) No 479/2009. In particular, government debt is general government consolidated gross debt at nominal

value. Information regarding the excessive deficit procedure and its application to different Member States since 2002

can be found at: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm.

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Box 1.3:

Excessive Deficit Procedures under the new EU fiscal framework

The new EU fiscal framework was adopted on 29 April 2024. The rules on the opening of a deficit-

based Excessive Deficit Procedure (EDP) remain unchanged while the rules on the opening of a debt-

based EDP are changed and clarified in the amended Council Regulation (EC) 1467/97. (

)

In order to simplify the EU fiscal framework and increase transparency, a single operational indicator

(net expenditure) anchored in debt sustainability serves as a basis for setting the fiscal path and for

carrying out annual fiscal surveillance. Net expenditure means government expenditure net of interest

expenditure, discretionary revenue measures, expenditure on Union programmes fully matched by

revenue from Union funds, national expenditure on co-financing of programmes funded by the Union,

as well as cyclical elements of unemployment benefit expenditure. One-offs and other temporary

measures will also be excluded from the net expenditure indicator.

The EDP is specified in Article 126 of the Treaty on the Functioning of the European Union (TFEU).

Protocol 12 of the Treaty gives further details on the excessive deficit procedure, including the

reference values on deficit and debt. Council Regulation (EC) 1467/97 on speeding up and clarifying

the implementation of the EDP (the corrective arm of the Stability and Growth Pact) clarifies the

implementation of the excessive deficit procedure. Together, these provisions determine the steps to

be followed to reach a Council decision on the existence and correction of an excessive deficit.

The Commission will produce reports under Article 126(3) of TFEU on the basis of the following criteria:

•

whether the ratio of the planned or actual government deficit to gross domestic product exceeds

3% of GDP, unless:

−

the ratio has declined substantially and continuously and reached a level that comes close to

the reference value;

−

or, alternatively, the excess over the reference value is exceptional and temporary and the

ratio remains close to the reference value;

when the ratio of the government debt to GDP exceeds 60% of GDP, the budgetary position is not

close to balance (

) or in surplus and when the deviations recorded in the control account (

) of the

Member State exceed the established annual or cumulative thresholds (0.3% and 0.6% of GDP

respectively).

•

When assessing the existence of an excessive deficit in accordance with Article 126(3) TFEU, the

Commission should take into account all relevant factors. Substantial public debt challenges in the

Member State concerned should be considered a key aggravating factor. The increase of government

investment in defence, where applicable, should be considered as a relevant factor when assessing the

existence of an excessive deficit. The Commission shall give due and express consideration to any other

factors which, in the opinion of the Member State concerned, are relevant in order to comprehensively

assess compliance with the deficit and debt criteria and which the Member State has put forward to the

Council and the Commission. In that context, particular consideration shall be given to financial

contributions to fostering international solidarity and achieving the common priorities of the Union

(

) OJ L, 2024/1264, 30.4.2024,

Council Regulation (EU) 2024/1264 of 29 April 2024 amending Regulation (EC)

No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (europa.eu).

The consolidated version of Regulation No 1467/97 can be found at:

https://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=CELEX%3A01997R1467-20240430.

( ) The budgetary position shall be considered close to balance if the general government deficit does not exceed

0.5 % of GDP.

(

) The Commission will set up a control account for each Member State to keep track of annual and cumulative

upward and downward deviations of the net expenditure observed from the net expenditure path as set by the

Council pursuant to the new preventive arm Regulation (see footnote 5).

(Continued on the next page)

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Box (continued)

referred to in the new preventive arm Regulation. (

) For deficit-based EDPs, the relevant factors can be

considered for i) those Member States with debt below 60% and ii) those Member States with debt

exceeding 60% of GDP and satisfying the double condition of the overarching principle, i.e. that the

general government deficit remains close to the 3% of GDP reference value and its excess over the

reference value is temporary.

In the next step of the procedure, the Economic and Financial Committee (EFC) should formulate an

opinion in accordance with Article 126(4) TFEU within two weeks of the adoption by the Commission

of a report issued in accordance with Article 126(3) TFEU. Taking fully into account this opinion, the

Commission, if it considers that an excessive deficit exists, should address an opinion and a proposal

to the Council in accordance with Article 126(5) and (6) TFEU and inform the European Parliament

thereof. The Council should then decide on the existence of an excessive deficit in accordance with

Article 126(6) TFEU, as a rule within four months of the reporting dates established in Article 3(2) and

(3) of Regulation (EC) No 479/2009. When it decides that an excessive deficit exists, the Council should

at the same time make recommendations to the Member State concerned in accordance with Article

126(7) TFEU.

In its recommendation, the Council shall request that the Member State implements a corrective net

expenditure path which ensures that the general government deficit remains or is brought and

maintained below the reference value within the deadline set in the recommendation. The corrective

path should also ensure that the debt is kept on a plausibly downward path or remains at prudent

levels below 60% of GDP in the medium term. In the case of a debt-based EDP, the corrective net

expenditure path shall be at least as demanding as the net expenditure path under the preventive arm

from which the Member State deviated and correct as a rule the cumulated deviations of the control

account.(

)

(

) OJ L 1263, 30.4.2024,

Regulation (EU) 2024/1263 of the European Parliament and of the Council of 29 April

2024 on the effective coordination of economic policies and on multilateral budgetary surveillance and

repealing Council Regulation (EC) No 1466/97 (europa.eu).

(

) OJ L 1264, 30.4.2024. Council Regulation (EU) 2024/1264 amending Regulation (EC) No 1467/97 on speeding

up and clarifying the implementation of the excessive deficit procedure.

1.2.4. Exchange rate stability

The Treaty refers to the exchange rate criterion in the third indent of Article 140(1) as ’the

observance of the normal fluctuation margins provided for by the exchange-rate mechanism of

the

European Monetary System, for at least 2 years, without devaluing against the euro’.

Article 3 of the Protocol on the convergence criteria stipulates: ’The criterion on participation in the

exchange rate mechanism of the European Monetary System […] shall

mean that a Member State

has respected the normal fluctuation margins provided for by the exchange-rate mechanism of the

European Monetary System without severe tensions for at least the last 2 years before the

examination. In particular, the Member State

shall not have devalued its currency’s bilateral central

rate against the euro on its own initiative for the same period’

(

). Based on the Council Resolution

on the establishment of the ERM II (

), the European Monetary System has been replaced by the

Exchange Rate Mechanism II upon the introduction of the euro, and the euro has become the

centre of the mechanism.

(

) In assessing compliance with the exchange rate criterion, the Commission examines whether the exchange rate has

remained close to the ERM II central rate, while reasons for an appreciation may be taken into account, in accordance

with the Common Statement on Acceding Countries and ERM II by the Informal ECOFIN Council, Athens, 5 April 2003.

(

) 97/C 236/03 of 16 June 1997, OJ C 236, 2.8.1997, p.5.

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Box 1.4:

A reinforced approach to ERM II participation by means of upfront policy

commitments by the applicant Member States

Participating in ERM II is an essential step for a Member State with a derogation on the way to fulfil

the exchange rate criterion and to euro adoption. Fulfilling the exchange rate criterion through the

smooth participation in ERM II is provided for in Article 140 of the TFEU, Protocol No 13 to the TFEU

on the convergence criteria and the Resolution of the European Council on the establishment of an

exchange-rate mechanism in the third stage of economic and monetary union adopted in Amsterdam

on 16 June 1997 (

). In accordance with this framework, ERM II entry of a Member State with a

derogation requires a mutual agreement of all ‘ERM II parties’. These include the finance ministers of

euro area Member States, the European Central Bank, and the finance ministers and the central bank

governors of the non-euro area Member States participating in ERM II. The European Commission

provides analytical support to the ERM II process, but has no voting right and no right of initiative in

the ERM II entry process.

In July 2018, learning from past episodes of economic overheating in ERM II and the euro-area crisis,

the ERM II parties clarified the modalities of a reinforced approach for future ERM II participation with

a view of ensuring a smooth transition to, and participation

in, ERM II, in their statement on Bulgaria’s

path towards ERM II, stating that this approach would apply to all Member States wishing to join ERM

II from then onwards (

). The reinforced approach was confirmed in the later statement of the ERM II

parties of July 2019 on Croatia’s path towards ERM II participation

(

According to this reinforced approach, the applicant Member State and ERM II parties agree on a

number of policy commitments to be implemented by the former before joining ERM II. This package

of so called prior policy commitments aims at maximising the country’s

chances to operate smoothly

in ERM II. It is country-specific, targeted and covers policy areas that are highly relevant for a smooth

transition to and participation in ERM II including, for instance institutional quality, governance, the

financial sector, fiscal policy, or the business environment.

In particular, as being part of the euro area now also implies for a Member State to be part of the

Banking Union’s pillars of the Single Supervisory Mechanism (SSM) and the Single Resolution

Mechanism (SRM), the applicant Member State is expected to enter

into ‘close cooperation’ with the

ECB for banking supervision purposes at the latest by the time of its participation in ERM II. A Member

State with a derogation can join the Banking Union before its euro adoption via an arrangement called

‘close cooperation’. Entering in close cooperation with the ECB means that the significant credit

institutions established in the country concerned are supervised by the ECB via the involvement of the

domestic national supervisor. Entering in close cooperation also implies participation in the Single

Resolution Mechanism, including the Single Resolution Fund.

In terms of process, the ECB and the Commission monitor the fulfilment of the prior-commitments

undertaken by the applicant Member States in the respective areas of competence of the ECB and the

Union and in close cooperation with the Member State concerned. The two institutions regularly inform

ERM II parties on the progress made with the prior-commitments. A comprehensive assessment of the

applicants’ banking sector is carried out by the ECB as part of the process of establishing close

cooperation with the ECB. This includes an asset quality review and a stress test that aims at assessing

whether banks are fundamentally sound. The results of the comprehensive assessment are made

public on the ECB’s website

(

)

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31997Y0802%2803%29

(

) See:

https://www.consilium.europa.eu/en/press/press-releases/2018/07/12/statement-on-bulgaria-s-path-

towards-erm-ii-participation/

(

) See:

https://www.consilium.europa.eu/en/press/press-releases/2019/07/08/statement-on-croatia-s-path-

towards-erm-ii-participation/

(

) The results of the comprehensive assessment of six Bulgarian banks are available at:

https://www.bankingsupervision.europa.eu/press/pr/date/2019/html/ssm.pr190726~1b474e3467.en.html

(Continued on the next page)

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Box (continued)

In line with the long-standing ERM II practice, ERM II parties also expect applicant Member States to

take further policy commitments at the moment of joining ERM II with the aim of achieving a high

degree of sustainable economic convergence by the time the euro will be adopted.

At the time of writing this report, Bulgaria and Denmark were the only non-euro-area Member States

participating in ERM II. Bulgaria joined the ERM II on 10 July 2020 after having completed its prior

policy commitments (

). Bulgaria established close cooperation with the ECB. In addition, the prior policy

commitments of the Bulgarian authorities covered measures related to the macroprudential

framework, the supervision of the non-banking financial sector, the insolvency framework, the anti-

money laundering framework and the governance of state-owned enterprises (

At the time of ERM II entry, the Bulgarian authorities also committed to pursue sound economic policies

with the aim of preserving economic and financial stability and achieving a high degree of sustainable

economic convergence. In particular, the Bulgarian authorities committed to implement specific policy

measures (the so-called post-ERM II entry commitments) on the non-banking financial sector, state-

owned enterprises, the insolvency framework and the anti-money laundering framework (

(

) For the details on the decision of the ERM II parties on Bulgaria see:

https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1321

(

) For more details on the prior-commitments taken by Bulgarian authorities see:

https://www.consilium.europa.eu/media/36125/st11119-en18.pdf

(

) See:

https://www.ecb.europa.eu/pub/pdf/annex/ecb.pr200710_annex~29156bba37.en.pdf

In its assessment of the exchange rate stability criterion, the Commission takes into account

developments in auxiliary indicators such as foreign reserve developments and short-term interest

rates, as well as the role of policy measures, including foreign exchange interventions, and

international financial assistance wherever relevant, in maintaining exchange rate stability.

The assessment of this criterion verifies the participation in ERM II (see Box 1.4 for further

information on ERM II participation) and examines exchange rate behaviour within the mechanism.

The relevant period for assessing exchange rate stability in this Technical Annex is 20 May 2023 to

19 May 2025.

1.2.5. Long-term interest rates

The fourth indent of Article 140(1) of the Treaty requires that ’the durability of convergence

achieved by the Member State with a derogation and of its participation in the exchange rate

mechanism’ is ’reflected in the long-term interest rate levels’. Article 4 of the Protocol on the

convergence criteria further stipulates that ’the criterion on the convergence of interest rates […]

shall mean that, observed over a period of one year before the examination, a Member State has

had an average nominal long-term interest rate that does not exceed by more than 2 percentage

points that of, at most, the three best performing Member States in terms of price stability.

Interest rates shall be measured on the basis of long-term government bonds or comparable

securities, taking into account differences in national definitions’ (see Box

1.5).

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Box 1.5:

Data for the interest rate convergence

The fourth indent of Article 140(l) of the Treaty requires that the durability of nominal convergence

and exchange rate stability in Member States should be assessed by reference to long-term interest

rates. Article 4 of the Protocol on the convergence criteria adds that these

‘Interest

rates shall be

measured on the basis of long-term government bonds or comparable securities, taking into account

differences in national definitions’.

Article 5 of the Protocol requires that the Commission should provide the statistical data used for the

application of the convergence criteria. However, in the context of the interest rate criterion, the ECB

has developed the criteria for harmonising the series of 10-year benchmark bond yields on behalf of

Eurostat and collects the data from the central banks. The selection of bonds for inclusion in this series

is based on the following criteria:

•

issued by a central government;

a residual maturity as close as possible to 10 years;

adequate liquidity, which is the main selection criterion; the choice between a single benchmark or

the simple average of a sample is based on this requirement;

fixed coupon;

yield gross of tax.

For fifteen Member States, the residual maturity of the benchmark bond is at least 9.5 years. For

twelve Member States, the residual maturity of the benchmark bond is below 9.5 years, in particular

for Bulgaria with the residual maturity slightly above 6.55 years. All yields are calculated on the basis

of secondary market rates, where available. For Czechia, Germany, Malta and Spain a basket of bonds

is used, while a single benchmark bond is used in twenty-three Member States.

Data used in this Report can be found on Eurostat ("Maastricht criterion bond yields (mcby): EMU

convergence criterion bond yields", code: tec00097). The same series is also published by the ECB's

Statistical Data Warehouse (code IRS.M.Country

Code.L.L40.CI.0000.Currency Code.N.Z)

and in a

dedicated page in the ECB website with additional information:

http://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/long_term_interest_rates/html/i

ndex.en.html.

For the assessment of the criterion on the convergence of interest rates, yields on benchmark

long-term bonds have been taken, using an average rate over the latest 12 months. The reference

value for April 2025 is calculated as the simple average of the average long-term interest rates in

Ireland (2.8%), Finland (2.9%) and Italy (3.7%) plus 2 percentage points, yielding a reference value

of 5.1%.

1.2.6. Additional factors

Article 140(1) TFEU also requires that the reports take into account other factors relevant to

economic integration and convergence. These additional factors include financial, product and

labour market integration and the development of the balance of payments. The analysis of the

development of unit labour costs and other price indices, which is also prescribed by Article 140 of

the Treaty, is covered in the price stability section.

The assessment of additional factors gives an important indication of a Member State’s ability to

integrate into the euro area without difficulties. As regards the balance of payments, the focus is

on the situation and development of the external balance (

). Market integration is assessed

(

) The external balance is defined as the combined current and capital account (net lending/borrowing vis-à-vis the rest of

the world). This concept permits in particular to take full account of external transfers (including EU transfers), which

are partly recorded in the capital account. It is the concept closest to the current account as defined when the

Maastricht Treaty was drafted.

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through trade, foreign direct investment and a smooth functioning of the internal market.

Moreover, progress in financial integration is examined, together with the main characteristics,

structures and trends of the financial sector. Given that Member States which adopt the euro also

participate in the banking union, developments in national banking sectors are specifically looked

at as well.

Starting with the 2012 Convergence Report, the convergence assessment is aligned with the

broader European Semester approach which takes an integrated look at the economic policy

challenges facing EMU in ensuring fiscal sustainability, competitiveness, financial market stability

and economic growth.

The section on additional factors makes reference to the surveillance of macroeconomic

imbalances under the Macroeconomic Imbalance Procedure (

(

)

The key elements of the Macroeconomic Imbalance Procedure are described in Box 1.7 of the European Commission’s

2024 Convergence Report.

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2.1.

BULGARIA

LEGAL COMPATIBILITY

2.1.1. Introduction

The legal basis for the Bulgarska Narodna Banka (the BNB

– Bulgaria’s central bank), the Law on

the Bulgarian National Bank (the BNB Law) of 2024 (

), has been amended since the 2024

Convergence Report by the Law on the State Budget of the Republic of Bulgaria for 2025 (Law on

State Budget) (

). The Bulgarian authorities have amended the BNB Law to remedy the

incompatibility highlighted in the Commission’s 2024 Convergence Report. In particular, this

concerns issues flagged in the section on central bank independence in relation to Article 99(5) of

the Bulgarian Constitution (

). In accordance with paragraph 14 of its transitional and final

provisions, the BNB Law shall enter into force on the date specified in the Council Decision on the

adoption of the euro by Bulgaria. The entry into force would therefore be automatic and would not

require further action from the Bulgarian authorities. The BNB Law will replace and repeal the

previous BNB Law (

). Once it enters into force, the BNB Law is compatible with the relevant

provisions of the EU law.

2.1.2. Central bank independence

Article 15(3) of the BNB Law provides that the grounds for the early dismissal of a member of the

Governing Council, with the exception of the Governor, shall be established by a decision of the

Governing Council. A member of the Governing Council whose dismissal is proposed shall cease to

exercise their powers from the day of the

Governing Council’s

decision. The Governing Council’s

decision is subject to appeal before the Supreme Administrative Court within 7 days. The Supreme

Administrative Court gives its decision within 14 days of receipt of the appeal. This decision is final.

Ensuring personal independence requires that national legislation should allow reasonable time for

appealing a dismissal decision as well as for the judicial review to take place for appealing. The

short time-limit for the appeal and the very constrained timeframe for the judicial procedure in

Article 15(3) may be seen as a residual imperfection that Bulgaria should consider addressing in

the near future.

The Bulgarian Constitution has been amended in January 2024 in a matter that could indirectly

impact the BNB’s independence. The new Article

99(5) of the Bulgarian Constitution provides that,

in a case where no agreement is reached on the formation of a government, the President,

following consultations with the parliamentary groups and acting on a motion by the caretaker

prime minister-designate, appoints a caretaker cabinet, and schedules new elections within

2 months. A caretaker prime minister is to be appointed from among the Chairperson of the

National Assembly, the Governor or a Deputy Governor of the BNB, the President or a Vice-

President of the Bulgarian National Audit Office, and the Ombudsman (or a deputy thereof).

The appointment as caretaker prime minister of the Governor or one of the Deputy Governors of

the BNB could disrupt its effective and independent functioning. This would be potentially a serious

cause for concern. The appointment would only be for a limited period (until a regular government

is formed), but the caretaker government could be reappointed for several successive periods as

long as election results do not result in the formation of a government and new elections have to

be scheduled. To avoid such potential disruption and its possible impact on the BNB’s

independence, one possible solution stated in the Commission Convergence Report 2024 was the

amendment of

the BNB Law to provide sufficient and effective safeguards for the BNB’s

independence as required by EU law. Firstly, any appointment of the Governor or a Deputy

(

)

Law on Българска �½арод�½а ба�½ка (Bulgarian National Bank),

Darjaven vestnik issue 13, 13.2.2024.

(

) Law on the State Budget of the Republic of Bulgaria for 2025, Decree No. 53, 21.3.2025, Darjaven vestnik issue 26,

27.3.2025.

( ) Constitution of the Republic of Bulgaria, Darjaven vestnik issue 56, 13.7.1991.

(

)

Law on Българска �½арод�½а ба�½ка (Bulgarian National Bank), Darjaven vestnik issue 46, 10.6.1997.

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Governor of the BNB as a caretaker prime minister should be conditional on their explicit consent

and they should be empowered to refuse such an appointment. Secondly, if such consent is

expressed, the rules should prevent that person from holding both positions simultaneously,

because this could lead to conflicts of interest and lack of independence. In this respect, the

effective and independent functioning of the BNB must be preserved. This could be ensured

through the person’s resignation from their post at the BNB at the time of their appointment as

caretaker prime minister.

Article 13 of the BNB Law has been amended by paragraph 32 of the Transitional and Final

provisions of the Law on the State Budget, published on 27 March 2025, and a new paragraph (5)

has been added, stating that in the event that the Governor or Deputy Governor has expressed the

explicit consent to be appointed as caretaker prime minister (Acting Prime Minister) under the

procedure of Article 99, paragraph 5 of the Constitution of the Republic of Bulgaria, he/she shall

resign. The Governor or Deputy Governor has the right to refuse to be appointed as caretaker

prime minister (Acting Prime Minister) under the procedure of Article 99, paragraph 5 of the

Constitution of the Republic of Bulgaria. The Commission also welcomes the amendments made to

paragraph (4) of Article 13 according to which, in the event of the appointment of the Governor or

Deputy Governor as caretaker prime minister (Acting Prime Minister) under the procedure of Art.

99, para. 5 of the Constitution of the Republic of Bulgaria, the appointment of a new Governor,

respectively Deputy Governor, shall be held no later than one month from the termination of the

powers under the procedure of paragraph 8 of the BNB Law. Until the appointment, the powers of

the Governor shall be exercised by a deputy designated by him from among the Deputy Governors,

and for a Deputy Governor, Art. 20, paragraph 4 of the BNB Law shall apply. This procedure

ensures the continuity of central bank’s activities in case of appointment of the Governor or Deputy

Governor as caretaker prime minister (Acting Prime Minister).

Therefore, the incompatibility mentioned in the Commission’s Convergence Report 2024 in this

area has been resolved.

2.1.3. Prohibition of monetary financing and privileged access

There are no incompatibilities and imperfections in the BNB Law with regard to the prohibition of

monetary financing and privileged access, as enshrined in Article 123 and 124 of the TFEU.

2.1.4. Integration into the ESCB

Objectives

The objectives of the BNB are compatible with the TFEU.

Tasks

There are no incompatibilities and imperfections in the BNB Law with regard to the tasks of the

ESCB and the ECB.

2.1.5. Assessment of compatibility

The Bulgarian authorities have taken measures to remedy the incompatibility that was identified in

the 2024 Convergence Report. The BNB Law is compatible with Article 130 and Article 131 of the

TFEU and the ESCB/ECB Statute.

2.2.

PRICE STABILITY

2.2.1. Respect of the reference value

The 12-month average inflation rate, which is used for the convergence assessment, was above

the reference value at the time of the last convergence assessment of Bulgaria in 2024. The 12-

month average inflation rate decreased gradually from a high of 14.1% in March 2023 to 2.6% in

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December 2024. In April 2025, the reference value was 2.8%, calculated as the average of the 12-

month average inflation rates in Ireland, Finland and Italy plus 1.5 percentage points. The

corresponding inflation rate in Bulgaria was 2.7%, below the reference value. The 12-month

average inflation rate in Bulgaria is projected to increase above the projected reference value by

the end of 2025, fall back to the reference value in the first months of 2026 and stay below it for

the rest of 2026 (

). A review of a broad range of indicators does not identify causes for concern

regarding the sustainability of price stability.

Graph 2.1:

Bulgaria - Inflation criterion

(percent, 12-month moving average)

-2

Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan-25 Jan-26

Bulgaria

Reference value

Note:

The dots at the right end of the chart show the projected reference

value and 12-month average inflation rate of Bulgaria in December 2025 and

December 2026. The reference values for 2020, 2022 and 2024 refer to the

reference values calculated in the previous convergence reports.

Source: Eurostat, Commission's Spring 2025 Economic Forecast.

Graph 2.2:

Bulgaria - HICP inflation

(y-o-y percentage change)

-2

2019

2020

2021

2022

2023

2024

Bulgaria

Source: Eurostat.

Euro area

2.2.2. Recent inflation developments

The annual HICP inflation rate started to decline from 14.3% in January 2023 and flattened

around 2.8% in May-July 2024 before declining further to 2.1% in October-December 2024. It

then rose sharply at the beginning of 2025, peaking at 4% in March, before decreasing to 2.8% in

April 2025. At the beginning of 2023, headline HICP inflation was still above HICP inflation

excluding energy and food (core inflation), due to higher energy and food price inflation. With the

rapid disinflation of fuel and gas prices in 2023, overall inflation remained below core inflation in

the rest of 2023. In 2024, headline HICP inflation and core inflation remained close to each other,

as the fall in fuel prices in the second half of 2024 was largely offset by somewhat higher food

price inflation. The sharp price hikes at the beginning of 2025 concerned items both within and

outside the core inflation basket. These price hikes were largely due to restored higher VAT rates

for bread and restaurants, higher excise duties for tobacco, increased electricity and gas prices for

households, other utilities and administered prices, and higher food prices due to increased

international food prices. The drop in April 2025 of the annual HICP inflation rate was largely due

to a substantial reduction in hospital fees. Decreases in other administered prices and in gas and

fuel prices also contributed to the drop. Inflation in Bulgaria has been reconverging with that of the

euro area over the past 2 years. The average annual inflation rate in Bulgaria was 8.6% in 2023,

3.2 percentage points above the euro area. It then declined to 2.6% in 2024, narrowing the gap to

0.2 percentage point.

HICP inflation excluding energy and food declined from 11.1% in January 2023 to 3% in the May-

August 2024 period, decelerated further to 2.5% in December 2024. It then increased to 3.8% in

March 2025, before declining to 2.3% in April 2025. In 2023, services price inflation remained on

average 1 percentage point above non-energy industrial goods inflation while both components

were on a declining path. Services inflation reached 3% in April 2024. It then increased, mainly due

to tourism and transport services, and stabilised around 5% in the second half of 2024. Since mid-

2024, annual inflation in prices of packaged international holidays picked up to around 15%, as

VAT rates were restored. Apart from these items, services inflation in 2024 was driven by price

(

)

The Commission’s Spring 2025 Economic Forecast does not include the impact of lower fees for hospital services

and

of decreases in other administered prices on inflation in April 2025. When taking into account these measures, the

average inflation rate in Bulgaria would likely be close to the reference value by the end of 2025.

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increases in catering and accommodation services. Services inflation then rose to 7.2% in March

2025 and then fell to 3.5% in April 2025. Higher administrative and other fees, prices in

restaurants, and prices of communication services accounted for around 1.5 percentage points of

the acceleration in services price inflation between December 2024 and March 2025. In April,

hospital fees were reduced from 5,8 BGN to 1 BGN, that led to 2.9 percentage points decline in

annual services inflation. Other administered prices also contributed negatively to services inflation

in April 2025. Annual inflation in non-energy industrial goods prices continued to abate throughout

2024, and remained around zero in the September 2024

–

March 2025 period, benefiting from low

inflation in imported goods. Inflation in non-energy industrial goods then increased to 0.9% in April

2025 due to a base effect from the decision to reduce co-payments for certain medicines from

April 2024.

Table 2.1:

Bulgaria - Components of inflation

2019

HICP

Non-energy industrial goods

Energy

Unprocessed food

Processed food

Services

HICP excl. energy, food, alcohol and tobacco

HICP at constant tax rates

Administered prices HICP

2.5

0.2

1.4

5.3

4.0

3.2

1.8

2.4

2.6

2020

1.2

-0.1

-6.1

5.5

4.1

2.3

1.2

1.5

1.7

2021

2.8

0.7

10.6

-0.3

2.9

2.0

1.4

3.2

2.4

2022

13.0

7.1

26.8

20.0

17.2

8.2

7.6

13.3

6.2

2023

8.6

8.5

-1.3

15.5

12.0

9.4

8.9

8.7

6.9

(percentage change)

2024

2.6

1.3

-1.4

3.4

3.3

4.8

3.1

2.3

4.4

Apr-25

2.7

0.5

-1.0

3.4

4.0

5.4

3.0

2.3

4.3

weights

in total

2025

1000

306

108

227

309

615

1000

148

1) Measured by the arithmetic average of the latest 12-monthly indices relative to the arithmetic average of the 12-monthly indices in the previous period.

Source: Eurostat, European Commission calculations.

2.2.3. Underlying factors and sustainability of inflation

Macroeconomic policy mix and growth developments

Economic growth accelerated from 1.9% in 2023 to 2.8% in 2024, driven by private consumption.

In a context of a tight labour market and falling inflation, real wages continued to expand in 2024.

The continued growth in aggregate employment, as well as increased social transfers underpinned

strong nominal income expansion in 2023 and 2024. Combined with abating inflation, this led to

robust growth in real disposable income, which fuelled private consumption. The strong growth in

consumer credit also supported private consumption in 2023 and 2024.

Goods exports contracted in 2023, due to the decline in external demand, the strong negative base

effect from 2022 and some one-off factors (

). In 2024, exports of goods and services contracted

both in nominal and in real terms, while the terms of trade deteriorated. The decline in exports was

broad-based in terms of product categories, with somewhat deeper decline in cereals due to weak

harvest, but more concentrated geographically with sharp declines in a few destination countries.

The Russian war of aggression against Ukraine and the economic difficulties in other countries

have weighed on goods export.

Services exports expanded robustly in 2023, benefiting from the continued recovery in the tourism

sector and the expansion of services outsourced to Bulgaria. While these positive trends continued

in 2024, the volume of international transport services temporarily declined. Overall, in 2024

services exports contracted by 0.6% in real terms.

Investment held up well in 2023, increasing by 10.2% with an important contribution from public

sector investment and purchases of new equipment. In 2024, investment declined by 1.1% due to

lower public spending and roughly constant private sector borrowing. The accumulation of

inventories turned sharply negative in 2023. Firms accumulated more inventories in the form of

(

) Notably planned maintenance in the steel industry and the nuclear power plant and the ban on exports of petroleum

products processed from Russian oil.

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unfinished production and final goods in 2024, in parallel with the increase in imports and decline

in finished construction.

In 2023, imports contracted sharply, following the decline in exports and inventories and then

expanded in 2024, reflecting the buoyant private consumption growth.

Real GDP growth is forecast to slow down to 2% in 2025 and 2.1% in 2026 due to both external

and domestic factors. Private consumption is set to grow more moderately, as lower real

disposable income growth and precautionary savings constrain purchases by households. The

outlook for exports has also been revised downwards but is expected to accelerate moderately in

2026. In addition to subdued external demand, exports of goods in 2025 are affected by planned

maintenance works in the steel production and oil refining industries. Private investment is

projected to contract in 2025 and 2026 due to the heightened economic uncertainty. The assumed

acceleration in EU funds absorption is expected to support moderate investment growth that

accelerates in 2026. Wage moderation in the private sector is expected to continue, accompanied

by limited job losses, related to the worsened economic environment and the need to preserve

competitiveness and profitability among firms. Public sector wages are projected to grow strongly

in 2025, amid strong hiring in both years.

Bulgaria’s fiscal stance (

) is estimated to have been broadly neutral in 2024 and, based on the

Commission’s Spring 2025 Economic Forecast, the stance is expected to

become supportive in

2025 (-1.1 of GDP). It is projected to turn contractionary in 2026 (0.8% of GDP).

The BNB pursues its primary objective of price stability through an exchange rate anchor in the

context of the currency board with the lev pegged to the euro. The currency board serves as a key

macroeconomic policy anchor. The monetary tightening in the euro area has affected the non-

financial corporations lending segment of the Bulgarian banking sector by increased interest rates,

but the pass-through to the mortgage lending segment has been rather muted. Country-specific

factors in the setting of interest rates, high domestic liquidity and competition in the sector explain

the continued strong lending for house purchases. The deposit base continued to grow due to

growing disposable income and as households prioritise liquidity and remain risk averse, while

awareness of alternative investment options remains weak in a context of low financial literacy.

The ample liquidity in the banking sector provided cheap and abundant funding for credit

expansion. Moreover, mortgage lending interest rates are predominantly linked to the domestic

deposit interest rates, which has contributed to keeping down the lending rates, against a backdrop

of strong competition among leading banks. In 2024, with the easing of inflation and monetary

conditions in the euro area, the practice of Bulgarian banks seeking temporarily higher returns

from arbitrage on financial markets abroad instead of expanding domestic market shares, appears

to have declined.

Given the risks to the debt-servicing

capacity of borrowers, and the quality of banks’ assets, the

BNB reconfirmed the systemic risk buffer at 3% on 11 December 2023. Moreover, the BNB’s

Governing Council increased the minimum required reserves on the funds attracted from non-

residents from 5% to 10% as from 1 June 2023. The minimum required reserves on the funds

attracted from both residents and non-residents were increased from 10% to 12% as from 1 July

2023. The increased reserve requirements were motivated by high inflation, high consumer

demand, dynamic credit activity, and slow and weak transmission from the monetary tightening in

the euro area to the domestic financial market. As of October 2024, the BNB imposed borrower-

based limits to commercial banks in the form of a maximum loan-to-value ratio of 85%, a limit of

debt service to disposable income of 50% and maximum maturity of 30 years. The measures

appear targeted at the low-income higher-risk borrowers that would be the first and hardest-hit by

adverse economic conditions.

(

) The fiscal stance is measured as the change in primary expenditure (net of discretionary revenue measures), excluding

COVID-19-related temporary emergency measures but including expenditure financed by non-repayable support

(grants) from the Recovery and Resilience Facility and other EU funds, relative to medium-term potential growth. A

negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure growth compared

with medium-term economic growth, indicating an expansionary (contractionary) fiscal policy.

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Table 2.2:

Bulgaria - Other inflation and cost indicators

2019

HICP inflation

Bulgaria

Euro area

Private consumption deflator

Bulgaria

Euro area

Bulgaria

Euro area

Labour productivity

Bulgaria

Euro area

Nominal unit labour costs

Bulgaria

Euro area

Imports of goods deflator

Bulgaria

Euro area

-0.2

-0.5

-6.0

-3.9

16.4

9.8

23.2

21.8

-3.6

-4.3

-0.6

-2.1

1.4

2.0

8.8

4.4

3.3

-0.4

10.9

3.4

12.5

6.4

8.5

4.7

5.4

0.3

-1.5

-4.6

7.7

4.7

3.0

1.1

0.8

-1.0

1.7

-0.1

2.1

1.2

6.9

2.3

-0.6

0.6

7.2

-0.4

6.0

2.3

11.3

4.3

16.0

6.7

14.2

4.5

8.1

6.3

13.4

5.3

4.9

2.5

10.4

4.5

2.5

1.2

0.3

2.8

2.6

13.0

8.4

8.6

5.4

2.6

2.4

2020

2021

2022

2023

2024

(annual percentage change)

2025

3.6

2.1

3.5

1.9

9.6

3.3

1.7

0.3

7.8

3.0

-0.1

-0.6

2026

1.8

1.7

2.5

1.7

6.1

2.7

1.8

0.8

4.2

1.9

0.3

-0.1

Nominal compensation per employee

1) Commission's Spring 2025 Economic Forecast.

Source: Eurostat, Commission's Spring 2025 Economic Forecast.

Wages and labour costs

The labour market remained tight in 2023 and

2024, with the unemployment rate fluctuating

between 4% and 4.5%, amid increasing

participation rates and employment rates.

Compensation per employee grew nominally by

13.4% in 2023 and by 10.4% in 2024.

Throughout 2024 wage growth slowed from

13.8% in Q1 2024 to 4% in Q4 2024 and the

number of employees in manufacturing declined,

as inflation pressures subsided and firms aimed

to improve their competitive position given

weakened external demand.

Graph 2.3:

Bulgaria - Inflation, productivity and wage trends

-3

2019 2020 2021 2022

2023 2024

2025 2026

Productivity (real GDP per person employed)

Nominal compensation per employee

Nominal unit labour costs

HICP inflation

(y-o-y % change)

Given the relatively low-income levels in Bulgaria,

the setting of the minimum wage has an

important effect both on income inequality and

Source: Eurostat, Commission's Winter 2025 Economic Forecast.

on labour market outcomes, such as participation

rates and regional disparities. The minimum wage was increased by 9.9% at the beginning of

2023, still below the accumulated inflation since the previous update on 1 January 2021. As from

1 January 2024 the minimum wage was increased by 19.6%, to BGN 933 (EUR 477), following an

amendment to the Labour Code aligned with Directive (EU) 2022/2041 on adequate minimum

wages. Accordingly, the minimum wage in 2024 has to amount to 50% of the average wage in the

July 2022 - June 2023 period. The same rule led to a further increase in the minimum wage by

15% in January 2025. Aggregate labour productivity improved by 0.9% in 2023 and by 1.7% in

2024, reflecting the stronger output expansion and some employment gains. Overall, unit labour

costs (ULC) increased by 12.3% in 2023 and 8.5% in 2024.

The aggregate ULC dynamics in 2023 and 2024 conceal important sectoral developments. In

2023, wage growth in manufacturing accelerated to 23% in Q1 2023 (possibly reflecting the

strong productivity gains in 2022) and then decelerated to 14% in Q4 2023 as firms tried to gain

competitiveness in export markets. In 2024, manufacturing firms optimised production costs

through labour shedding to accommodate the sizeable wage increases that reached almost 24%

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on aggregate in the sector. Wages in key service sectors (e.g. trade, transport and hospitality) have

been growing much more moderately, especially in 2024. In the other services sectors, buoyant

domestic demand led to intensified hiring and strong wage increases. Consequently, domestic cost

pressures in services with low productivity gains contributed to higher value added deflators in

these sectors. Wage increases in the public sector were also an important factor in the strong

aggregate wage dynamics in 2023 and 2024.

External factors

Import prices are an important channel through which external price shocks affect the domestic

price dynamics. The import deflator turned negative in 2023 and was almost constant in 2024. The

disinflation process abroad has affected consumer prices directly via imported consumer goods

and indirectly through prices of raw materials, etc.

The lev’s real effective exchange rate, which is determined by the price of the lev vis-à-vis

the

currencies of 37 major trade partners, appreciated by 2.5% in 2023 and 1.1% in 2024. The

appreciation in 2023 was strongly influenced by the depreciation of the Turkish lira against the

euro. Türkiye

is Bulgaria’s most important trading partner outside the EU, accounting

for 5.6% of

total exports and 8.2% of total imports in 2023. In 2024, the appreciation of the Bulgarian lev was

close to the long-term average and is explained by the higher domestic inflation compared to that

of the major trading partners.

Administered prices and taxes

The share of administered prices in the HICP basket in 2025 is slightly higher at around 15%,

compared with 12% in the euro area. Prices of electricity and water were increased substantially in

2023 and 2024 by the regulator. Electricity prices were subsequently increased by 8.4% in January

2025. Heat energy prices were also increased in 2023, and were subsequently decreased in 2024,

broadly following price developments for natural gas. The decision to reduce co-payments for

certain medicines in late March 2024 has also brought down the administered prices since April

2024. Overall, annual administered price inflation remained on average 1.9 percentage points

above headline HICP inflation in the November 2023-March 2025 period and then fell 2.7

percentage points below overall HICP inflation in April 2025.

Indirect taxes had a slight negative effect on inflation in 2023 and a positive effect in 2024 and at

the beginning of 2025. The energy measures (lower VAT rates for natural gas and central heating

and exemption of excise duties for gas and electricity) expired only in mid-2023. As a result, HICP

inflation at constant tax rates was above headline HICP inflation in 2023. In 2023 and 2024,

excise duties on cigars and cigarettes were increased cumulatively by almost 10%. Combined with

the full effect from the abolition of energy support measures in mid-2023, these changes led to a

negative gap between HICP inflation at constant tax rates and headline HICP inflation in 2024. This

gap widened at the beginning of 2025, following the expiration of VAT decreases for bread, flour

and restaurants and the increase in excise duties on tobacco products by 6% (

). Another increase

of the excise duties on tobacco products of around 4% was introduced in May 2025. In the euro

area, annual constant-tax HICP was below headline inflation by 0.1 percentage point in 2023 and

by 0.5 percentage point in 2024.

A comparison between the HICP index and Eurostat’s measure of HICP at constant tax rates shows

that the changes in indirect taxes in Bulgaria in January 2025 contributed directly to an increase in

Bulgaria’s month-on-month

headline inflation in January 2025 by around 0.6 percentage point.

This, together with the impact from higher regulated electricity and gas prices, which is estimated

at around 0.4 percentage point, drives the forecast increase in annual inflation throughout the

current year.

(

) VAT rates of 20% were restored, after the expiration of the 0% VAT on bread and flour and the 9% on restaurants,

introduced in mid-2020.

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Medium-term prospects

The Commission’s Spring 2025 Economic Forecast projects that average annual inflation will

increase from 2.6% in 2024 to 3.6% in 2025 and gradually ease to 1.8% in 2026. After the price

increases in Q1 2025, as discussed in Section 2.2.2., and the reduction in April 2025, inflation

developments in the rest of 2025 and in 2026 are set to be driven by both external prices and

domestic cost factors. Food prices are projected to broadly follow international developments. The

pass-through of lower international energy and other commodities prices is projected to keep

inflation down, including via second-round effects on transport services. The disinflation process in

the services sector is set to benefit from the continuation of wage moderation and the need to

preserve the competitiveness position in exported services in a context of a worsened external

environment.

Increased inflation in 2023 has brought the consumer price level in Bulgaria closer to the euro

area average. The level of consumer prices in Bulgaria nevertheless stood at about 57% of the

euro area average in 2023. This suggests that there is potential for price level convergence in the

long term, as GDP per capita in terms of purchasing power standards (about 61% of the euro area

average in 2023) rises towards the euro area average.

Medium-term inflation prospects will depend on the containment of price expectations and on

wage-productivity developments, as well as on the functioning of product and services markets.

These developments may be substantially affected by the cyclical position of the economy.

2.3.

PUBLIC FINANCES

2.3.1. Recent fiscal developments

The Bulgarian deficit has remained within the 3% of GDP Treaty reference value since 2022.

However, after decreasing to 2.0% in 2023, the deficit returned to 3.0% in 2024. The expenditure-

to-GDP ratio increased from 38.8% to 39.8% whereas the revenue-to-GDP ratio in 2024 remained

broadly stable at 36.7% from 36.8%, also due to higher social security contributions and direct

taxes, which benefited from favourable employment dynamics.

In 2023, changes in income policy parameters such as the minimum and maximum insurable

income drove social contributions up. Revenues were further supported by the introduction of a

100% dividend policy on SOEs. Increases in public sector salaries and pensions that had been

enacted in previous years started to have a budgetary impact. However, the outturn deficit for

2023 was also affected by the normalisation of energy prices, which contributed to a sharp

decrease in subsidies (down by 46.7% from 2022, the equivalent of 2.2% of GDP).

Declining inflation in 2024 resulted in more moderate revenue increases, while the expenditure

side continued to grow steadily due to legislative changes from 2022 that continued to have an

impact in 2024. The deterioration in the deficit was partly driven by the sustained spending

increases in public sector salaries and in social benefits, in particular on pensions, not fully

matched by revenue increases. For pensions the main driver was the yearly indexation based on

the so-called

‘Swiss rule’ (by 12% as of 1 July 2023 and

by 11% as of 1 July 2024) and top-ups

for pensions under the poverty line. Further increases were recorded in sickness and

unemployment benefits among others. The one-off statistical recording of settled liabilities for

road infrastructure works from 2020-22 also contributed, by 0.5% of GDP, to the increase in the

deficit. Public investment decreased compared to 2023, partly due to the base effect in 2023

coming from the end-of-period absorption of the EU funds of the 2014-2020 programme.

Measures on the revenue side included a package of measures to fight tax evasion and avoidance,

including improved checks on goods with high fiscal risk and improved exchange of information on

cross-border payments. On the other hand, SOE dividends collected in 2024 were lower than in

2023, driving down other current revenues.

The fiscal stance was broadly neutral in 2024, driven by the expansionary contribution of net

nationally financed primary current expenditure and of other capital expenditure that were largely

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offset by lower nationally financed gross fixed capital formation and the slightly contractionary

contribution of EU-funded expenditure compared to 2023, which was the last year for the

absorption of the EU funds for the programming period 2014-2020.

The debt ratio increased from 22.5% in 2022 to 22.9% in 2023. The primary deficit of 1.4% of

GDP in 2023 and the impact of nominal GDP growth cancelled each other out, but the joint impact

of interest expenditure and a positive stock-flow adjustment led to the increase. In 2024, the

general government debt-to-GDP ratio further increased to 24.1%, mostly driven by a larger

primary deficit (2.5% of GDP) and interest expenditure, which more than offset the impact of

robust nominal GDP growth.

2.3.2. Medium-term prospects

On 27 February 2025, Bulgaria submitted its national medium-term fiscal structural plan to the

Council and the Commission, covering the 2025-2028 period.

The net expenditure growth in the plan averages 4.9% over the 2025-28 adjustment period. In

terms of structural primary balance, the plan envisages a yearly adjustment of 0.16% of GDP. The

indicative strategy to meet the fiscal targets included in the plan is heavily reliant on revenue

measures, and it envisages expenditure increases, notably in public sector salaries, pensions and

social benefits.

On 12 May 2025, the Commission recommended to the Council to endorse Bulgaria’s plan.

Based

on the plan’s policy commitments and macroeconomic assumptions, the net expenditure path put

forward in the plan is consistent with the requirements as set out in Article 16(2) of Regulation

(EU) 2024/1263.

The 2025 budget was adopted by the National Assembly on 21 March 2025. On the revenue side,

it heavily relies on the yields of measures to fight tax evasion and avoidance and on dividend

policy, but it is also supported by other measures such as planned increases in excise duties on

tobacco products and by the reinstatement of standard VAT rates including for restaurants, bread

and flour. A positive impact on the budget is also expected from increases in maximum and

minimum insurable income, resulting in higher social security contributions, and by improvements

in arrears management.

On the expenditure side, the budget for 2025 envisages public sector salaries to grow, in line with

recent trends, with the largest budgetary impact from increases in the remuneration of defence

and security staff, followed by salary increases for teachers and increases in the minimum wage.

Pension spending is expected to increase further, largely due to the impact of the Swiss rule, of

other pension supplements (for instance widow’s supplements), as well as the impact of newly-

awarded pensions. Public investment is expected to increase considerably in 2025 compared to

2024, driven by the planned acceleration of RRP implementation, which needs to be completed by

mid-2026, and also driven by strong increases in defence investment due to the accrual of

planned deliveries of military equipment.

On 2 May 2025 Bulgaria submitted its 2025 Annual Progress Report, reporting on relevant fiscal

outturn data and projections, and the implementation of reforms and investments responding to

the main challenges identified in the European Semester country-specific recommendations. The

2025 Annual Progress

Report also reflects Bulgaria’s biannual reporting on the progress made in

delivering on its recovery and resilience plan in accordance with Article 27 of Regulation (EU)

2021/241.

Based on the Commission’s 2025 Spring Economic Forecast, the general

government deficit is

projected at 2.8% of GDP in both 2025 and 2026. Net expenditure is expected to grow by 9.2% in

2025, above the recommended growth rate of 6.2% for the same year. This is due to the

combination of expenditure increases on pensions and public sector salaries and of a marked

increase in expenditure on defence, including investment, as well as to higher public investment in

other areas. On 2 May Bulgaria submitted a request to activate the National Escape Clause (NEC)

for increases in its defence spending. On 4 June 2025, the Commission recommended a Council

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Chapter 2 - Bulgaria

recommendation for the activation of the NEC for Bulgaria, allowing Bulgaria to deviate from, and

exceed, the net expenditure path to be set in the Council recommendation endorsing its medium-

term fiscal plan. Accounting for the flexibility under the NEC, the net expenditure growth for 2025

is expected to be in line with the net expenditure growth ceilings contained in Bulgaria’s medium-

term plan. The general government debt-to-GDP ratio is forecast to increase to 25.1% in 2025 and

to reach 27.1% in 2026.

Table 2.3:

Bulgaria - Budgetary developments and projections (as % of GDP unless indicated otherwise)

Outturn and forecast

General government balance

- Total revenue

- Total expenditure

of which:

- Interest expenditure

p.m.: Tax burden

Primary balance

Fiscal stance

Recommended growth in net

expenditure (%)

Growth in net expenditure (%)

Government gross debt

p.m: Real GDP growth (%)

20.1

3.8

24.4

-3.2

23.8

7.8

22.5

4.0

2019

2.2

38.6

36.4

0.6

30.5

2.7

2020

-3.8

37.5

41.3

0.5

30.3

-3.3

2021

-4.0

37.5

41.5

0.5

30.7

-3.5

2022

-3.0

38.3

41.3

0.4

31.1

-2.6

2023

-2.0

36.8

38.8

0.5

29.9

-1.5

1.1

2024

-3.0

36.7

39.8

0.5

30.9

-2.5

-0.2

2025

-2.8

38.8

41.6

0.6

32.2

-2.2

-1.1

6.2

9.2

22.9

1.9

24.1

2.8

25.1

2.0

2026

-2.8

38.4

41.2

0.7

31.8

-2.1

0.8

4.9

1.7

27.1

2.1

1) Commission’s Spring 2025 Economic Forecast.

2) The fiscal stance is based on the increase in net expenditure (including that financed by the EU budget) relative to medium-term

potential GDP growth. A positive (negative) sign indicates a contractionary (expansionary) fiscal stance (in % of GDP). The fiscal

stance profile in 2020-2023 does not include the temporary impact of COVID-19 emergency measures.

Source: European Commission.

Based on the Commission’s estimates, the fiscal

stance is projected to become expansionary in

2025, at

–1.1%

of GDP. The expansionary fiscal

stance in 2025 is largely driven by EU-financed

expenditure. The contribution of net nationally

financed investment is also projected to be

slightly expansionary (-0.2% of GDP) in 2025. The

fiscal stance is expected to turn contractionary in

2026 (0.8% of GDP), mainly on account of the

slower growth in nationally financed primary

current expenditure and nationally financed

investment.

Graph 2.4: Bulgaria - Fiscal stance and its components

(percent of GDP)

Contractionary

-1

-2

2023

Expansionary

2024

2025

2026

Expenditure financed by RRF grants and EU funds (e)

Other capital expenditure (d)

Nationally financed investment (c)

Net nationally financed primary current expenditure (b)

Fiscal stance (f=a+e) 2024 2025

Net nationally financed primary expenditure (a=b+c+d)

Medium-term fiscal sustainability risks are

assessed as medium. Government debt is projected to increase from 24.5% of GDP in 2024 to

around 39% in 2035 (

). This projection assumes that the structural primary deficit (prior to

accounting for expected changes in the cost of ageing) will remain constant at 2.3% of GDP as of

2025 (

The sensitivity analysis confirms this risk assessment since negative macro-fiscal shocks (i.e. a

lower structural primary balance, a higher interest-growth rate differential or a temporary interest

(

) For more details on the methodology, see European Commission (2025), Debt Sustainability Monitor 2024, Institutional

Paper 306, March 2025.

( )

Bulgaria’s medium-term

plan implies that debt would reach around 41% of GDP in 2035, broadly similar to the

baseline projection at unchanged policy in the Debt Sustainability Monitor 2024.

Source: Commission's Spring 2025 Economic Forecast.

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Chapter 2 - Bulgaria

rate shock) would result in only somewhat higher debt ratios by 2035. On the other hand, if the

structural primary balance were to return to its historical 15-year average of 0.6% of GDP, the

debt ratio would be about 14 percentage points lower in 2035. The stochastic projections point to

a large degree of uncertainty around the baseline projection.

Several factors mitigate risks, including the low share of short-term government debt and the

small amount of general government contingent liabilities. Risk-increasing factors include the

relatively high share of non-performing loans in the Bulgarian banking sector and the substantial

share of public debt denominated in euro although this risk is mitigated by the currency board and

the prospect for euro adoption.

The key elements of a robust fiscal framework are in place in Bulgaria, but some difficulties in

implementation remain. Bulgaria has a complex system of national fiscal rules in place, unchanged

since the 2024 Convergence Report. Several rules target the same budget aggregates but the fact

that they are expressed according to different accounting standards (accrual and cash-based) may

create conflicting messages. Moreover, the capacity of the Ministry of Finance to monitor, plan,

forecast and report on the general government budget in both accrual and cash terms remains a

challenge, especially with respect to the management and planning of government finances. The

Ministry does not always have as much information or access to detailed data as would be

desirable for budgetary planning. Information is lacking on the operations of entities outside the

central administration and occasionally even of some other ministries. The Ministry of Finance also

has weaknesses in producing projections on an accrual basis (e.g. under the European System of

National and Regional Accounts (ESA)).

There is potential to enhance the capacity and independence of the Bulgarian independent fiscal

institution (IFI), the Fiscal Council of Bulgaria (FCB). It currently has a narrow mandate, monitoring

compliance of fiscal rules and assessing the macroeconomic and budgetary forecasts and is

supported by a thinly staffed Secretariat of only two full-time employees. The six-year mandates

of Members are not staggered, increasing the need for transparency in the appointment process.

The mandates of the current Members expired in November 2021 and new Members were

appointed in March 2025. The amended Budgetary Framework Directive (2011/85/EU) which is to

be transposed by 31 December 2025, will affect some aspects of the Bulgarian fiscal framework,

particularly relating to the

Fiscal Council’s independence safeguards and tasks.

The planning and budgeting of public investments is undergoing reform, but implementation

challenges remain. Bulgaria shows scope for improvement on key dimensions such as (i) aligning

investment decisions with their long-term strategic goals; (ii) vertical (between levels of

government) and horizontal (across sectors) coordination; (iii) the application of consistent value-

for-money criteria and methodologies to investments not financed by EU-funds; (iv) limiting the

under-execution of capital expenditure; and (v) the carry-over of unspent funds.

2.4.

EXCHANGE RATE STABILITY

The Bulgarian lev joined the Exchange Rate Mechanism II (ERM II) on 10 July 2020. The Bulgarian

National Bank (BNB) entered in parallel into a ‘close cooperation’ agreement with the ECB. After

joining, Bulgaria committed to pursue a set of policy measures (known as post-entry

commitments) to ensure that its participation in the mechanism is sustainable and achieves a high

degree of economic convergence before the adoption of the euro. The measures cover four policy

areas: (i) the non-banking financial sector; (ii) the insolvency framework; (iii) the anti-money

laundering framework; (iv) and governance of state-owned enterprises.

Bulgaria introduced its currency board framework on 1 July 1997, pegging the Bulgarian lev to the

German mark and subsequently to the euro (at an exchange rate of 1.95583 BGN/EUR). Under the

currency board framework, the BNB has to fully cover its monetary liabilities with foreign reserves.

The BNB is obliged to exchange monetary liabilities and euro at the official exchange rate without

any limit.

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Bulgaria’s international reserves are large, at 41% of GDP in 2024 (down from around 44% of

GDP in 2023). International reserves increased from around EUR 38 billion at the beginning of

2023 to around EUR 42 billion at the end of 2023. The reserves decreased in the first half of 2024

to around EUR 38 billion and then increased to around EUR 42 billion by the end of 2024. Most of

the inflows to the reserves in 2023 reflected the issuance of government securities on

international financial markets. Positive contributions were also made by a net positive flow from

purchases and sales of reserve currency by commercial banks. In 2024, sales of reserve currency

by banks had the largest negative contribution to the gross international reserves, while

Government and

other depositors’ funds

had a positive contribution.

Graph 2.5:

Bulgaria - BGN/EUR exchange rate

(monthly averages)

2.1

Graph 2.6:

Bulgaria - Annual effective interest rate spread to

1-M Euribor

(basis points, monthly values)

2.0

1.9

-10

-20

-30

-40

1.8

2019

2020

2021

2022

2023

2024

-50

2019

2020

2021

2022

2023

2024

Source: ECB.

Source: Eurostat and National Bank of Bulgaria.

The BNB does not set monetary policy interest rates. The euro area’s monetary policy affects

domestic interest rates directly through the operation of Bulgaria’s currency board. The BNB

discontinued the production of short-term reference rates (e.g. SOFIBOR) from 1 July 2018. The

BNB instead publishes a base interest rate (BIR) based on the LEONIA Plus (LEv OverNight Interest

Average Plus) index, which is a reference rate of concluded and effected overnight deposit

transactions in Bulgarian lev on the interbank market in Bulgaria. The BIR stood at 1.8% in January

2023. It increased throughout most of 2023, reaching 3.9% in October 2023 and remained at that

level until May 2024. It decreased gradually to 2.4% in March 2025. The changes in the BIR closely

tracked those of the 1-month Euribor rate. The interest rate differential between the BIR and the

1-month Euribor narrowed from -15 basis points at the beginning of 2023 to virtually no

differential by the end of that year. The interest differential widened slightly throughout 2024 and

stood at 3 basis points in March 2025.

2.5.

LONG-TERM INTEREST RATES

Long-term interest rates used for the convergence examination reflect the secondary market yield

on a single benchmark Bulgarian government bond with a residual maturity of around 6.5 years.

Graph 2.7:

Bulgaria - Long-term interest rate criterion

(percent, 12-month moving average)

Graph 2.8:

Bulgaria - Long-term interest rates

(percent, monthly values)

Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan-25

Bulgaria

Source: European Commission.

Reference value

-2

2019

2020

2021

2022

2023

2024

Bulgaria

Source: Eurostat.

Germany

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The Bulgarian 12-month moving average long-term interest rate relevant for the assessment of

the Treaty criterion was below the reference value in the 2024 convergence assessment of

Bulgaria. The average interest rate increased from 1.6% in January 2023 to 3.9% at the end of

2024. It stood at 4.0% until September 2024 and slightly decreased to 3.9% since then. In April

2025, the reference value, calculated as the average of long-term interest rates in Ireland, Finland

and Italy plus 2 percentage points, was 5.1%. In that month, the 12-month moving average of the

yield on the Bulgarian benchmark bond was 3.9%, i.e. 1.2 percentage points below the reference

value.

The Bulgarian long-term interest rate has been stable at or close to 4% since April 2023, following

two stepwise increases in February and March 2023. The long-term interest rate increased from

1.9% in January 2023 to 4.2% in March. Thereafter, it remained unchanged at 4.0% for the rest of

2023 and at 3.9% throughout 2024 and up to April 2025. The increase in the long-term interest

rate at the beginning of 2023 reflected the very high inflation that Bulgaria experienced in 2022

and the tightening of monetary policy in the euro area that year. The stability of the long-term

interest rate at the higher level is due to the use of a single benchmark bond at any point in time

for this assessment and the fact that the bond is infrequently traded on the secondary market.

Financial developments are therefore not seen in the yields until the bond is either traded or

replaced by a new benchmark bond. The difference between the Bulgarian and German long-term

interest rates remained within a range of 1.4-1.9% from March 2023 to April 2025. The higher

spread compared to its historical average of around 1.2% during the past decade likely reflects the

combined effects of higher inflation, heightened political uncertainty in Bulgaria and the thin

secondary market for Bulgarian government debt securities.

2.6.

ADDITIONAL FACTORS

The Treaty (Article 140 TFEU) calls for an examination of other factors relevant to economic

integration and convergence that the Commission should take into account in its assessment. The

assessment of the additional factors (including balance of payments developments, and product,

labour and financial market integration) gives an indication of a Member State’s ability to integrate

into the euro area without difficulties.

In December 2024, the Commission published its 14th Alert Mechanism Report (AMR 2025) under

the Macroeconomic Imbalance Procedure. The report concluded that it was not necessary to carry

out further in-depth analysis on Bulgaria in the context of the Macroeconomic Imbalance

Procedure. Developments related to cost competitiveness, dynamic household borrowing, and

strong house-price growth remain a concern and require continued close monitoring. Nevertheless,

nominal wage growth has been on a declining path with sharp deceleration in Q4 2024. House

prices have continued to increase. They have been growing more slowly than income since 2013

but are estimated to be overvalued by around 10-15%. Household debt remains low as share of

GDP despite dynamic credit flows that are supported by very low interest rates on mortgages. In

terms of financial stability, in February 2024, the European Systemic Risk Board concluded that the

residential real estate market in Bulgaria was subject to medium risks and the macroprudential

policy mix was partially appropriate and partially sufficient to mitigate the situation. Borrower-

based macroprudential measures were introduced by the Bulgarian National Bank in September

2024.

Bulgaria’s recovery and resilience plan (RRP) includes measures to address a series of

structural

challenges by reforming the energy sector, investing in sustainable transport and green transition,

promoting deployment of 5G networks, strengthening rule of law and the fight against corruption,

promoting entrepreneurship and e-governance, improving the quality and inclusiveness of

education and reforming the minimum income scheme. The plan is supported by EUR 5.7 billion of

RRF funding.

Bulgaria has implemented 23% of the plan’s milestones and targets and received one

disbursement of EUR 1.37 billion or 24% of the overall allocation.

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On 16 April 2025, Bulgaria submitted a request to revise its RRP in line with Art. 21 of the RRF

Regulation. The revision concerns nearly all measures in the RRP and aims to bring the plan back

on track and deliver

on the original plan’s

key objectives. Together with its request for revision,

Bulgaria has submitted a proposal for a REPowerEU chapter.

Some important reforms in areas such as anti-money laundering, insolvency framework, SOE

governance reform and education have progressed. Implementing key reforms in the areas of

energy, business environment and rule of law, is crucial to deliver on the RRP commitments.

Investments providing support for small and medium enterprises, industrial modernisation and

healthcare have progressed. However, overall implementation faces significant delays and needs

to accelerate in order to complete all measures by August 2026.

In addition, cohesion policy funding helps tackle Bulgaria’s growth and competitiveness challenges

and aims to reduce the country’s territorial and social disparities. In the current 2021-2027

programming period, cohesion policy provides Bulgaria with EUR 10.7 billion to further support

Bulgaria’s competitiveness, green transition, including energy independence, the just transition and

climate change resilience, as well as upward social convergence, including by addressing labour

shortages, further developing educational systems and skills and making them more inclusive for

disadvantaged groups. Bulgaria has made progress in implementing cohesion policy but challenges

remain.

2.6.1. Developments in the balance of payments

Bulgaria’s external balance

(i.e. the combined current and capital accounts) turned positive to 0.7%

in 2023 and deteriorated to -0.1% in 2024. Net services exports improved markedly in 2023 with

the recovery in tourism exceeding pre-pandemic levels and other services, including those

outsourced to Bulgaria (e.g. IT and business services). It then slowed down in 2024 largely due to a

temporary decline in transport services exports to Germany and Greece in Q2 and Q3 2024. The

trade balance improved in 2023 as imports declined more steeply than exports on account of a

deep contraction in inventories accumulation and more moderate private consumption. In 2024

trade balance deteriorated as external demand remained constrained, while imports of goods

increased on account of stronger domestic demand. The Russian war of aggression continued to

weigh on the export performance in 2024, with goods exports to the Russian Federation and

Ukraine contracting by 26% and 38%, respectively, in nominal terms. The terms of trade

deteriorated in both 2023 and 2024. The primary income deficit widened to 6.6% of GDP and then

shrank to 5.1% in 2024, driven by the rise and the subsequent decline in foreign direct investment

(FDI) income. Secondary income balance deteriorated as a share of GDP in 2023 and 2024, while

capital account balance improved in both years. The developments in the secondary income

balance were largely determined by the current transfers from the EU to the government, including

direct payments under the Common Agricultural Policy and other non-investment grants. In 2023,

the capital account balance improved mostly due to lower value of purchases of land abroad by

residents. In 2024, capital transfers from the EU in the form of investment grants account for

most of the increase in the capital account balance.

The financial account, net of official reserves, deteriorated to

–2.5%

of GDP in 2023 and then

turned slightly positive in 2024. FDI, notably in the form of reinvested earnings, made the largest

negative contribution to the financial account balance in both years. Net investments in debt

securities abroad contributed by 1% of GDP and 1.5% of GDP to the financial account in 2023 and

2024, respectively. The improvement in 2024 is largely attributable to the increased investments

in long-term debt securities abroad by the banking sector, related to the high domestic liquidity

and higher returns on foreign financial assets. The balance of other investments had a limited

impact on the financial account balance, with gross inflows and outflows of currency and deposits

roughly offsetting each other. The BNB’s reserve assets increased by 3.5% of GDP in 2023 and

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Chapter 2 - Bulgaria

then decreased by 0.9% of GDP in 2024, largely mirroring the developments of the external

balance and financial account (

Table 2.4:

Bulgaria - Balance of payments

2019

Current account

of which: Balance of trade in goods

Balance of trade in services

Primary income balance

Secondary income balance

Capital account

External balance

(percentage of GDP)

2020

0.4

-3.1

5.7

-3.7

1.6

1.4

1.9

4.2

-4.1

1.2

-2.2

9.4

-5.1

2.3

20.1

20.7

-23.4

2021

-1.1

-4.0

6.5

-4.8

1.3

0.7

-0.4

3.9

-1.6

3.2

-2.8

5.1

-1.2

4.3

20.7

20.5

-15.6

2022

-2.7

-5.9

7.0

-5.6

1.8

0.9

-1.7

2.7

-4.1

1.2

1.0

4.6

-1.9

4.5

22.7

20.1

-8.7

2023

-0.9

-4.2

8.3

-6.6

1.6

0.7

1.0

-4.2

1.3

0.4

3.5

-2.5

0.3

19.7

20.4

-6.3

2024

-1.8

-5.2

7.5

-5.1

1.0

1.7

-0.1

-0.6

-2.2

2.3

0.1

-0.9

0.2

-0.6

20.4

19.5

-3.7

1.7

-4.7

8.1

-4.8

3.1

1.5

3.1

3.6

-2.0

2.6

3.9

-0.9

4.5

0.5

20.7

22.4

-30.8

Financial account

of which: Direct investment

Portfolio investment

Other investment

Change in reserves

Financial account without reserves

Errors and omissions

Gross capital formation

Gross saving

Net international investment position

1) The combined current and capital account.

2) Including financial derivatives.

Sources: Eurostat, European Commission calculations, the Bulgarian National Bank.

The net international investment position further

improved to

–5%

of GDP in 2024, having stood at

over -50% of GDP a decade ago. The

improvement reflects both nominal GDP growth

as well as higher growth in foreign assets than in

liabilities on the back of subdued FDI inflows.

The real effective exchange rate deflated by the

HICP appreciated in 2023 and then depreciated in

2024 as domestic inflation abated. By contrast,

the real effective exchange rate deflated by unit

labour costs (ULC) accelerated, as domestic wage

growth outstripped the wage dynamics abroad.

Graph 2.9:

Bulgaria - Effective exchange rates

(vs 36 trading

partners;

monthly averages;

130

index numbers, 2019 = 100)

125

120

115

110

105

100

2019

2020

2021

2022

2023

2024

NEER

REER, HICP-deflated

REER, ULC-deflated

With the deterioration of external demand in

2023, exporters sharply reduced inventory accumulation and cut purchases from abroad. Wage

growth also decelerated throughout 2023 and 2024, reflecting firms’ efforts

to secure

competitiveness gains against the backdrop of deteriorated foreign demand. In an environment of

deteriorating world exports in 2023, Bulgarian export market share improved by 1.8%, driven by

services exports.

The Commission’s Spring 2025 Economic

Forecast projects that the current account will remain

slightly negative at to

–1.1%

of GDP in 2025 and -1% of GDP 2026 as imports grow faster than

exports.

(

)

Valuation changes (exchange rate or price changes) of the country’s external assets and liabilities, as well as other

changes, e.g. arising from changes in residence, are not included in the balance of payments.

Source: European Commission.

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2.6.2. Market integration

The economy is well integrated with the euro area through trade and investment linkages. After a

decline between 2019 and 2020, the ratio of trade openness (see Table 2.5 for a definition)

rebounded to close to 71.2% in 2022, which was a new peak. It decreased to 61.5% in 2023 and

further to 55.6% in 2024. Bulgaria is a relatively open economy. Trade with the euro area was

around 25% of total trade in 2024. Germany, Italy and Greece were the main trading partners.

Outside the euro area, Bulgaria’s main trading partners were Türkiye

and Romania.

Table 2.5:

Bulgaria - Market integration

2019

Trade openness

(%)

Trade with EA in goods & services

2)+3)

(%)

IMD World Competitiveness Ranking

Internal Market Transposition Deficit

(%)

Real house price index

64.4

29.0

0.6

118.3

2020

56.8

25.7

1.6

124.4

2021

62.0

28.0

2.2

127.5

2022

71.2

30.7

1.8

125.1

2023

61.5

27.5

1.7

127.1

2024

55.7

24.5

1.6

141.1

1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments).

2) (Imports + Exports of goods with EA-20 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics).

3) Trade in services with EA-20 (average credit and debit in % of GDP at current prices) (Balance of Payments).

4) International Institute for Management Development (IMD).

5) Percentage of internal market directives not yet communicated as having been transposed, relative to the total.

6) Deflated house price index (2015=100) (Eurostat).

Sources: Eurostat, World Bank, International Institute for Management Development, European Commission calculations.

Net FDI inflows have remained low, at 5.5% of GDP in 2023 and then declined to 3.1% of GDP in

2024. Reinvested earnings accounted for most the FDI inflows in those two years, while direct

investment in equity from abroad contracted in 2024. The low inward FDI since the 2008-09

global financial crisis reflects low investor appetite and difficulties to attract fresh capital. The

stock of inward FDI as a share of GDP continued to decline to 62% in 2024, down from 65% in

2023, due to both low FDI inflows and sustained nominal GDP growth. In 2024, financial and

insurance, real estate and manufacturing constituted around 60% of the total inward FDI stock, in

almost equal proportion.

Unsupportive

business

environment

and

Graph 2.10:

Bulgaria - World Bank's 2024 Worldwide Governance Indicators

Voice and

institutional quality remain important challenges.

accountability

1.2

According to the World Bank’s 2024 Worldwide

Political stability and

0.6

Governance Indicators, Bulgaria ranks markedly

Control of corruption

absence of

violence/terrorism

0.0

lower in rule of law, fight against corruption and

-0.6

regulatory quality than the average of the five

Government

Rule of law

euro area Member States with the lowest scores

effectiveness

(

). Political favouritism has been shown to have

Regulatory quality

a strong impact on public tenders and to have

Bulgaria

Euro area average five lowest

Euro area average

adverse

effects

productivity

and

Note:

Estimate of governance ranges from -2.5 (weak) to 2.5 (strong). The values in this

competitiveness (

). The Bulgarian RRP includes

chart are for 2023.

Source: World Bank.

several measures to improve the business

environment. These include ambitious reforms of the judiciary and anti-corruption reforms

(including on whistle-blowing), the overhaul of the public procurement framework, the liberalisation

of the electricity market, and strengthening the frameworks for insolvency, anti-money laundering

and the governance of state-owned enterprises. The last three are also part of the post-entry

(

)

A Member State is considered to have a ‘low’ (‘high’) ranking compared with the average five euro area Member States

with the lowest scores for each indicator if its score is at least 0.3 percentage point lower (higher) than that of the

average of this group of five euro area Member States. See also European Commission, 2024 Rule of Law Report,

Country Chapter on Bulgaria.

( )

Fazekas, M., Poltoratskaya,V., Schiffbauer, M.T., and Tóth, B., ‘Procuring Low

Growth: The Impact of Political Favoritism

on Public Procurement and Firm Performance in Bulgaria’, Policy Research Working Paper, Prosperity Washington, D.C.:

World Bank Group, 2025.

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Chapter 2 - Bulgaria

commitments that Bulgaria made when it entered ERM II. After considerable delays, the

implementation of several of these RRP reforms is under way and progressing (see also Section

2.7. on the Sustainability of Convergence).

Bulgaria has taken action to improve the framework for preventing and fighting money laundering,

its predicate offences and the financing of terrorism. These actions include amending the Law on

Measures Against Money Laundering to strengthen the capacity of national anti-money laundering

and countering the financing of terrorism (AML/CFT) supervisory authorities to act where obliged

entities fail to comply with their obligations and adopting an action plan for countering money

laundering and terrorism financing (2023-2027) whose implementation is underway.

Bulgaria has also taken steps to: enhance the accuracy of beneficial ownership information

through a mechanism for the reporting of discrepancies; reinforce the analytical capacity of the

Financial Intelligence Unit to make better use of suspicious transaction reports (STRs) through the

implementation of new IT software for the submission of STRs and other reports and information

which became operational in March 2024; communicate swiftly targeted financial sanctions

adopted and amended by the UN Security Council; and to identify the subset of non-profit

organisations which are likely to be at risk of abuse for terrorist financing. Bulgaria underwent an

assessment of the effectiveness of its AML/CFT framework against international standards

developed by the Financial Action Task Force. As a result, Bulgaria was placed under increased

monitoring and adopted an action plan, in October 2023 to address the deficiencies. The Bulgarian

authorities are in the process of implementing the action plan.

The education system faces serious difficulties to ensure quality and inclusiveness. Around half of

15-year-old students lack basic numerical and reading competences according to the Programme

for International Student Assessment. Socio-economic background

has a major impact on students’

performance, with children from disadvantaged groups performing considerably worse. To tackle

some of these challenges, the Bulgarian RRP supports the creation of STEM learning centres, which

is ongoing. The lack of basic skills translates to significantly fewer students entering higher

education than the EU average, while quality standards for admission are lower.

Labour and skills shortages remain a significant challenge and risk worsening, considering the

educational attainment and negative demographic trends. This in turn, combined with the high

inactivity rates for Roma and persons with disability, poses challenges for economic growth and

social outcomes.

Bulgaria also scores low on digital skills and the update of digital technologies. Only 35.5% of

Bulgaria’s population has basic digital skills, which is among the lowest rates in the EU. Bulgaria

scores very low on the digitalisation of businesses, with small and medium enterprises particularly

affected. One of the priorities

of both Bulgaria’s RRP and Cohesion policy investments is to improve

digital skills with significant investment to adapt the skill set of the workforce. Moreover, the RRP

includes measures such as a voucher scheme for the digitalisation of small and medium sized

enterprises and is complemented by targeted Cohesion Policy investments.

Public and private R&D investments remain amongst the lowest in the EU as share of GDP. The

public research landscape is very fragmented with many educational institutions and research

organisations receiving limited funding. Linkages between academia and business are not well-

established and make commercialisation of research results difficult.

Regional disparities in Bulgaria remain high. GDP per capita in the capital Sofia is around three

times higher than in the other regions. Similar differences are observed in labour productivity,

demographics, education and training, employment, healthcare and infrastructure. In addition, the

lower administrative capacity in some regions further impairs their ability to organise

procurements, implement investments and to deliver public services and policies Addressing

territorial disparities is one of the high-level

objectives laid down in the Bulgaria’s 2021-2027

Partnership Agreement.

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Table 2.6:

Bulgaria - Allocation of assets by financial sub-sector

Financial corporations (total)

Central bank

Monetary financial institutions

Other financial intermediaries

Non-MMF investment funds

Insurance co. and Pension Funds

2023

169

2019

721

271

192

113

2023

2019

2023

698

278

172

113

Ratio to GDP (%)

EA 5 smallest

2019

177

2023

189

2019

172

2019

Share of total (%)

EA 5 smallest

2019

2023

Central bank

Monetary financial institutions

Other financial intermediaries

Non-MMF investment funds

Insurance co. and Pension Funds

1) MMF stands for money market funds.

Source: Eurostat.

Bulgaria’s financial sector is smaller and less developed than the euro area’s.

The assets of the

financial sector amounted to 169% of GDP in 2023, which was much less than in the euro area

(698% of GDP) but broadly similar to the average of the five euro area Member States with the

smallest financial sectors. As in the euro area, the size of the financial sector as a share of GDP

has shrunk in Bulgaria since 2019. Banking dominates the Bulgarian financial sector, making up

55% of the financial sector’s assets

in 2023. The BNB is the second largest holder of financial

assets with a share of 26% in 2023, more than all non-banking financial intermediaries taken

together. These shares are larger than in the euro area, reflecting a relative underdevelopment of

non-bank financial intermediaries and investment funds, similar to that of the five euro area

Member States with the smallest financial sectors. At the same time, the relative share of the

insurance and pension-fund sector in Bulgaria is similar to that in the euro area.

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Table 2.7:

Bulgaria - Financing of the economy1)

Ratio to GDP (%)

2019

Total liabilities

Loans

Non-financial co. debt securities

Financial co. debt securities

Government debt securities

Listed shares

Unlisted shares

Other equity

Trade credits and advances

361

114

2018

Loans

Non-financial co. debt securities

Financial co. debt securities

Government debt securities

Listed shares

Unlisted shares

Other equity

Trade credits and advances

2023

2019

2023

345

2019

762

235

191

2023

725

219

189

EA 5 smallest

2019

318

104

2023

301

Share of total (%)

EA 5 smallest

2019

2023

1) The table focuses on the financing needs of a country and how these are met by the financial system. The table is constructed

from the liabilities of all economic sectors, but only considers loans, debt securities, equity and trade credits. The sum of liabilities

in the table only reflects the total for the liabilities considered.

Source: Eurostat.

As to the financing of the economy, outstanding liabilities are much lower than in the euro area

(345% of GDP in 2023 vs 725% of GDP in the euro area) but higher than those of the euro area

Member States with the lowest financing needs. As in the euro area, loans are the dominant source

of funding. However, Bulgaria has less developed bond and equity markets than the euro area and

market financing (debt securities and listed shares) is relatively underdeveloped. Equity and

private-sector-debt markets represented 2% of liabilities in 2023 (and only 11% of GDP

altogether), compared with 19% of liabilities in the euro area (where private-sector debt and listed

stocks

amounted to 72% and 65% of GDP respectively). Bulgaria’s financing structure is broadly

similar to that of the five euro area Member States with the smallest financial needs, except for

the smaller size of its bond market. The latter mostly reflects the low level of public debt in the

country. Trade credits and advances play a bigger role in the financing of the economy in Bulgaria

than in the euro area, even when compared with the five euro area Member States with the lowest

financing needs.

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Bulgaria’s banking sector is well integrated into

the euro area’s financial sector, in particular

through a high level of foreign ownership in the

banking system. The ratio of foreign-owned

institutions to total bank assets was 73% in

2023, down from 78% in 2019. Bank

concentration (as measured by the market share

of the five largest credit institutions in total

assets) has increased significantly since 2019

and reached almost 77% in 2023. This is

27 percentage points above the euro area

average in 2023.

Graph 2.11:

Bulgaria - Foreign ownership and concentration

in the banking sector

(in percent, weighted averages)

100

BG, 2019

BG, 2023

EA, 2019

EA, 2023

Concentration in the banking sector (CR5 ratio)

Share of foreign institutions as % of total assets

Source: ECB, Structural financial indicators.

2.7.

SUSTAINABILITY OF CONVERGENCE

This concluding section draws together elements that are key for gauging the sustainability of

Bulgaria’s convergence with the euro area. The analysis reviews sustainability from a number of

angles.

First, the sustainability dimension is inherent in the individual convergence criteria themselves. This

holds most explicitly for the price stability criterion, which includes the requirement of a

’sustainable price performance’. In principle, the fiscal criterion (EDP) also involves

a forward-

looking aspect, providing a view on the durability of the correction of fiscal imbalances. While the

exchange and interest rate criteria are, by construction, backward-looking, they aim to capture an

economy’s ability to operate durably under

conditions of macroeconomic stability, indicating

whether the conditions for sustainable convergence following euro adoption are in place.

Second, the assessment of additional factors (balance of payments, product and financial market

integration) required by the Treaty broadens the view on sustainability of convergence and allows

for a more complete picture, complementing the quantitative criteria. In particular, a sound

external competitiveness position, effectively functioning markets for goods and services and a

robust financial system are key to ensuring that the convergence process remains smooth and

sustainable.

Third, the convergence assessment should be informed by the results and findings of enhanced

policy co-ordination and surveillance procedures (MIP, fiscal governance), taking into account the

comprehensive reform of the EU’s economic governance rules in 2024. The aim is not to add to the

existing requirements for euro adoption, but to make full use of the comprehensive economic and

financial analysis undertaken under the European Semester. While some elements drawn from the

European Semester (e.g. related to AMR scoreboard indicators) are included in the relevant

chapters on convergence above, this section uses this framework more systematically to provide

an integrated view of the sustainability dimension.

Any assessment of the sustainability of convergence has limits and must be based on a judgement

of the likely future development of the economy. In particular, as experience has shown, the

sustainability and robustness of the convergence process after euro adoption is to a significant

extent endogenous, i.e. it depends on a Member State’s domestic policy

measures after it has

joined the euro area. Therefore, while the assessment of sustainability is an essential element in

determining a Member State’s readiness to adopt the euro based on initial conditions and existing

policy frameworks, the outcome of such an assessment should be seen as a snapshot at a specific

point in time. The long-term sustainability of the convergence process will also depend on the

adoption of appropriate policies over time. In this respect, the ongoing surveillance carried out in

the context of the European Semester will play a major part in ensuring that such policies are

implemented by the Member State after euro adoption.

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The analysis below looks at sustainability from four different perspectives: price stability; fiscal

performance and governance; structural resilience and growth sustainability; and financial

resilience.

Price stability

The synchronisation of Bulgaria’s business cycle with that of the euro area (see next sub-section)

tends to keep Bulgaria’s headline and core inflation at levels similar to those of the euro area.

Bulgaria’s inflation developments

were particularly closely aligned with those of the euro area over

the decade preceding the energy price shock of 2022. On average, between 2011 and 2021,

Bulgaria’s headline inflation rate averaged 1.1%, which was below the euro area average of 1.3%.

Core inflation during this period, at 0.4%, was considerably below the euro area average at 1.1%.

By contrast, between 2022 and 2024, inflation in Bulgaria was significantly higher than in the euro

area, with an average annual rate of 8.1% compared to 5.4% in the euro area. The de-coupling of

inflation in Bulgaria and the euro area during these years was mainly due to Bulgaria’s greater

exposure to the food and energy price shocks. The price hikes in imported energy and other

materials in 2022 led to a surge in production costs, thereby also contributing to higher prices for

domestically produced goods and services. The cost-push factor was more pronounced than in the

euro area because the Bulgarian economy is around three times more energy intensive than the

euro area and its cyclical position was stronger. As food accounts for a significantly higher share of

household consumption in Bulgaria, the food price shock had a disproportionately stronger impact

on headline inflation. Subsequently, the unwinding of the shocks led to a stronger disinflation

process in Bulgaria compared with the euro area. Headline and core inflation in Bulgaria both fell in

2024 by around 6 percentage points compared with a drop of 3 and 2.2 percentage points

respectively in the euro area.

The pick-up in inflation in Bulgaria in 2025 is of a temporary nature and mainly reflects increases

in January 2025 in a mix of taxes and administered prices, partially offset by the lowered hospital

fees in April. This effect is set to lead to higher inflation throughout 2025. As the temporary effect

of higher taxes and administered prices fades away, annual inflation is forecast to fall steadily

throughout 2026, leading to a decreasing inflation gap compared to the euro area (see Section

2.2.3.). Additional evidence on the temporary and not broad-based nature of the increase in

inflation in 2025 is provided by the median HICP inflation rate (

), which has remained below

2.5% since the beginning of the year, as well as by price expectations in the Commission’s

consumer and business surveys, which remain below their long-term averages (

Notwithstanding their recent deceleration, nominal unit labour costs (ULC) in Bulgaria have risen

strongly historically, with an annual average growth of 6.3% since 2011. This trend increase in ULC

occurred in both the tradeable and non-tradeable sectors of the economy, with a relatively limited

difference between manufacturing and the rest of the economy. Nevertheless, the increase in ULC

has not been associated with a loss in Bulgaria’s export market share, which increased by around

10% between 2011 and 2013 and has remained broadly steady since then (

). This preservation

of Bulgaria’s export market share was

supported by a mix of margin compression, i.e. reduced

profits per unit of exports, non-labour cost compression, and improved non-cost competitiveness

through a gradual shift towards higher value-added and tech-intensive products (

). The growth

profile of wages and ULC will need to be carefully monitored in the coming years in view of the

important implications for price stability, the economy’s adjustment capacity and external

(

) Median inflation is the month-on-month inflation rate of the component whose expenditure weight is in the 50th

percentile of price changes.

By omitting outliers (small and large price changes), median inflation provides an

alternative measure of underlying inflation. The value above refers to the unweighted measure of median

inflation.

(

) European Commission, Business and consumer survey results for April 2025,

Statistical Annex.

(

) Market performance of exports, Annual macro-economic database (AMECO) of the European Commission's Directorate

General for Economic and Financial Affairs.

(

) Evidence supporting this conclusion is also provided in Ivanov Evgeni and Ivanova Neli (2021),

‘Determinants

Bulgarian Exports: the Role of Price and Non-Price Competitiveness’, Bulgarian National Bank, Discussion Paper

DP/118/2021.

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competitiveness. In this context, it will be important to focus structural policies and reforms on

productivity growth, including technological upgrades to continue sustainable economic

convergence without lasting price pressures.

Bulgaria’s

successful integration into the euro area will require the continued careful monitoring of

inflation pressures, with longer-term inflation prospects contingent on wages growing in line with

productivity. In this respect, continued high growth in public sector wages constitutes a risk for

higher aggregate wages in Bulgaria. These factors could weigh on the adjustment potential, cost

competitiveness and inflation prospects of the economy.

Structural resilience and growth sustainability

When assessing Bulgaria’s capacity to function smoothly in the euro area, an important dimension

is its current degree of cyclical synchronisation with the euro area and risks that that this

synchronisation may weaken in the future. Such a risk will depend on Bulgaria’s macroeconomic

vulnerabilities and exposure to economic shocks as well as its capacity to adjust to such shocks.

Bulgaria’s economic cycle has been closely synchronised with that of the euro area for the past

two decades, both in terms of the real GDP growth rate and the output gap and it is forecast to

continue doing so in 2025 and 2026. This cyclical synchronisation is higher than for most other

non-euro

area Member States. To a large extent, it is explained by Bulgaria’s highly open economy,

its strong integration in the EU single market, and the pegging of the lev to the euro since 1999 in

the context of the currency board framework. In turn, the latter has been backed by prudent fiscal

policy and low government debt.

Bulgaria’s trade grew strongly from the early 2000s up to its EU

accession and then throughout its EU membership. More than half of exports and imports of goods

and services are with the EU, with Germany, Romania, Italy and Greece being the most important

markets. Türkiye is also an important trading partner.

As to vulnerabilities and exposure to shocks, Section 2.6. stressed that the Macroeconomic

Imbalance Procedure did not identify major imbalances in Bulgaria in 2025. In particular, the

country’s external position appears solid. The external balance (the combined

current and capital

account) has been positive most of the time since 2011 and the net international investment

position (NIIP) improved substantially from

–97%

of GDP in 2009 to around -4% of GDP in 2024.

Moreover, Bulgaria’s NIIP excluding non-defaultable

instruments, such as foreign direct investment

and equity shares, has been positive over recent years and reached 46% of GDP in 2024. Bulgaria

also enjoys relatively high export diversification, which reduces its exposure to sectoral trade

shocks. Measures of export diversification such as the Herfindahl-Hirschman Index put Bulgaria

among the EU Member States with a high export diversification (

). Nevertheless, two sources of

external vulnerability should be mentioned. The first is cost competitiveness, which was already

mentioned in the subsection on inflation. The second relates to the country’s high exposure to

energy and food prices. As witnessed in recent years, shocks to global energy and food prices have

a stronger pass-through into domestic inflation than the euro area average. The decarbonisation of

energy production in Bulgaria, including through higher investment in renewables, would

strengthen the competitiveness of the Bulgarian economy and reduce its exposure to energy price

shocks.

The 2025 MIP also identifies two sources of domestic vulnerability: strong growth in credit to

households and signs of overvaluation in house prices. Although the household debt-to-GDP ratio

remains low, at 26% in 2024, credit flows remain high - in 2024, they were equivalent to 21% of

the debt stock in 2023 - and has stood above the MIP threshold of 14% since 2021. According to

the 2025 Alert Mechanism Report, house prices are estimated to be slightly overvalued by around

10-15%, with continued strong growth in 2023 and 2024.

(

) Herfindahl-Hirschman

Market Concentration Index a measure of the dispersion of trade value across an exporter’s

partners. It ranges from 0 for perfect diversification and 1 for perfect concentration (i.e. lower values indicate that

exports are more diversified).

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Several features of the Bulgarian economy support its capacity to adjust to shocks, including its

labour market and low public debt. Bulgaria’s adjustment capacity was amply tested during the

pandemic and energy crises, when the economy faced extraordinary headwinds. The contraction in

economic activity in 2020 was lower than in the euro area and the recovery in output in 2021 and

2022 was stronger.

Bulgaria’s labour market is relatively flexible and efficient and this flexibility should

facilitate

adjustment to changes in economic conditions. Despite unprecedented shocks, the unemployment

rate has declined by more than 1 percentage point since the COVID-19 crisis and now stands more

than 2 percentage points below the euro area. However, the Bulgarian labour market also suffers

from some weaknesses in terms of skills shortages (see Section 2.6.2.) and structurally fast

growth in wages (see subsection on inflation above). The former requires structural challenges in

the education system to be addressed and increases in adult training. Another positive feature of

Bulgaria’s adjustment capacity relates to the level of its public debt. In 2024, the country’s public

debt amounted to 24% of GDP, the second lowest ratio in the EU. In the medium term, such a low

level of government debt should provide the fiscal space that is needed in a monetary union in the

event of adverse shocks. In the shorter term, however, Bulgaria’s fiscal space is constrained by a

deficit, which remains close to the 3% limit.

Bulgaria’s adjustment capacity remains hindered by a non-supportive

business environment.

Various reports and indicators by international institutions, such as the World Bank’s Worldwide

Governance Indicators, IMD’s World Competitiveness Report and OECD’s Product Market Regulation

(PMR) indicators (

), point to an unfavourable business environment, and low government and

business efficiency. Businesses in the country report that the most significant hindrances to a

better business environment are corruption, frequent changes in regulations, bureaucracy, and

biased public procurement (

). Businesses have also consistently complained about the quality of

regulatory work (

) and the failure to ensure a level playing field (

). Regulatory barriers remain

higher in Bulgaria than in comparable countries for lawyers, notaries, architects and civil engineers.

Improving the business environment would both enhance productivity and improve the capacity of

firms to respond to shocks.

In recent years, Bulgaria has implemented several reforms that should support its resilience and

adjustment capacity. There is, however, substantial scope for further progress in this area. In July

2019, the country committed to implementing policy measures prior to joining the ERM II in the

following six policy areas: banking supervision; the macroprudential framework; the supervision of

the non-banking financial sector; the anti-money laundering framework; the insolvency framework;

and the governance of state-owned enterprises (SOEs). In June 2020, the Bulgarian authorities

notified the ERM II parties of the fulfilment of these commitments, which the ECB and the

Commission assessed as effectively implemented. At the time of its ERM II entry in July 2020,

Bulgaria committed to implementing further policy measures in the following four areas: i) the

non-banking financial sector; (ii) insolvency framework; (iii) the anti-money laundering framework;

and iv) the governance of SOEs.

Measures implemented in the non-banking financial sector aim to improve supervisory practices

and the governance and functioning of the insurance sector. Insolvency framework measures

included: an overhaul of the legislative framework; training programmes for insolvency

practitioners; development of manuals, guidelines and specialised electronic tools; and improved

data collection and publicity. Regarding anti-money laundering, Bulgaria committed to enhance the

capacity of supervisors and adopt a risk-based approach to detecting and countering such

activities. On SOEs, the authorities committed among other elements to improve their governance

(

) See:

https://www.worldbank.org/en/publication/worldwide-governance-indicators;

International Institute for Management

Development/World Competitiveness Centre, World Competitiveness

Booklet 2024; and OECD’s Product Market

Regulation (PMR) indicators, Key takeaways from the 2023-2024 update of the OECD Product Market Regulation

indicators, ECO/CPE (2024)99.

( ) Bulgarian Industrial Association

–

2024 through the eyes of the business.

(

) EIB Investment Survey 2022

–

European Union overview.

(

) European Commission, 2023 and 2024 editions of the Rule of Law Report, Country Chapter on Bulgaria.

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by ensuring competitive procedures for board appointments and regular financial performance

reporting.

Bulgaria’s recovery and resilience plan includes an ambitious

set of structural reforms and

investments but has faced delays. Bulgaria made some progress with implementing reforms to

strengthen the rule of law and improve the overall business environment. It has yet to implement

major reforms to and investments in the decarbonisation of the energy sector, as well as further

business environment reforms, notably on anti-corruption. In April 2025, Bulgaria submitted a

comprehensive revision of its RRP, including a REPowerEU chapter, with a view to bringing the plan

back on track and achieving its ambitious objectives. Accelerating the implementation of the

planned investments and reforms would strengthen the resilience of the economy and ensure

Bulgaria benefits fully from its funding allocation under the recovery and resilience facility.

Financial resilience

Bulgaria’s financial sector has shown stability and resilience, particularly since the 2009

international financial crisis and during the COVID-19

pandemic and in the aftermath of Russia’s

invasion of Ukraine. The banking sector is by far the largest financial subsector in Bulgaria,

although it is still small relative to the size of its economy when compared to the EU and euro area

Member States on average.

The accession of Bulgaria to the Banking Union in 2020 led to the direct supervision by the ECB of

5 commercial banks registered in Bulgaria, which hold approximately three quarters of all assets in

the banking sector.

The banking sector is well-capitalised

and profitable. Bulgaria’s banking sector capital

adequacy

and liquidity ratios have remained at consistently high levels. The tier-1 capital ratio is estimated

at 22.0% as of December 2024, compared with an EU average of around 17.5%. Bulgaria’s

banking sector liquidity coverage ratio, at around 240% at end-December 2024 (

), was also well

above the EU ratio of around 165% (

) and around two-and-a-half times higher than the

regulatory minimum required level of 100%.

The banking sector records healthy profits. The sector is expected to have achieved record profits

in 2024, driven by strong net interest income. The Bulgarian National Bank estimates a return on

equity (ROE) at the end of December 2024 of around 16.0%. This compares with a return of 10.5%

in 2024 for EU banks (

). The Bulgarian banking sector has experienced rapid growth in lending

over the past several years, with a focus on mortgage lending. Low interest rates, abundant

liquidity in the banking system, rapid income growth and positive consumer sentiment together

have contributed to the dynamic credit activity. In September 2024, the total amount of loans for

households grew by 21.3% year on year, while loans to non-financial corporations (NFCs)

increased by 9.1%. The prolonged period of strong lending activity leads to a possible

accumulation of credit risks in the banking system’s balance sheet, which in the medium term

could put some downward pressure on the high levels of profits by Bulgarian banks. However,

while the ratio of non-performing loans (NPLs) remains relatively high, the rapid increase in loan

volumes has not translated into growing NPLs. The share of non-performing exposures continue to

decline to historically low levels in all major segments of the

banks’ loan portfolio, mostly due to

write-offs and sales of NPLs. A roadmap on the insolvency framework reform was adopted in

2019 as part of the ERM II prior-commitments to prepare Bulgaria for successful participation in

ERM II. The ERM II post-entry commitment on insolvency sought to implement the roadmap. To this

end, the changes to the Bulgarian Commercial Act in 2023 and secondary legislation aim to

address long-standing

shortcomings in Bulgaria’s insolvency and restructuring regime.

The

legislative amendments and measures to implement these are also part of the Bulgarian RRP. In

(

) Banks in Bulgaria October–December 2024, Bulgarian National Bank (see:

https://www.bnb.bg/bnbweb/groups/public/documents/bnb_publication/pub_b_in_b_2024_12_en.pdf).

(

) Liquidity coverage ratio, EU countries participating in the Single Supervisory Mechanism. ECB Data Portal (see:

https://data.ecb.europa.eu/data/datasets/SUP/SUP.Q.B01.W0._Z.I3017._T.SII._Z._Z._Z.PCT.C).

(

) European Bank Authority,

Risk Dashboard

Q4 2024.

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recent years, the Bulgarian National Bank has repeatedly increased the countercyclical capital

buffer rate applicable to domestic credit risk exposures to further strengthen the resilience of the

banking system and prevent an excessive build-up of risks. The Bulgarian National Bank also

introduced borrower-based measures targeted at low-income higher-risk borrowers as of October

2024.

Bulgaria’s capital market is underdeveloped and does not adequately support financing needs for

both the government and corporates. Recent initiatives could help increase capital market growth

by increasing financial literacy and engaging market participants. In April 2023, the Bulgarian

Ministry of Finance published a report, which included 60 recommended actions, with the objective

of increasing the availability of investable assets and the level of trust in the Bulgarian capital

market and ultimately making the use of the capital markets cheaper and more efficient within a

time horizon of 5 years (

). Over the past few years Bulgaria has been a net lender to the rest of

the world, partially due to limited domestic investment opportunities, depicted by still underutilised

and relatively inefficient domestic capital markets. Local private-equity (PE) and venture-capital

(VC) markets remain too small to meet the financing needs of innovative firms. In addition, VCs in

Bulgaria focus more on early-stage businesses, which is positive for innovation but may pose

challenges when scaling start-ups, supressing growth prospects.

The supervisory framework for Bulgaria’s non-banking

financial sector has been significantly

strengthened both in preparation for the country’s

Exchange Rate Mechanism II entry in 2020 and

since then, in addressing post-ERM II policy commitments. The insurance market, though highly

concentrated, remains significantly smaller than the EU average, with notable distinctions between

its life and general insurance segments. The low insurance penetration and steady economic

growth present promising opportunities for insurers to grow and both life and non-life insurance

are projected to expand rapidly in the years to come.

Conclusion

The broad-based analysis of underlying factors relevant for the sustainability of Bulgaria’s

convergence suggests that sufficiently robust conditions are in place for the country to be able to

maintain a sustainable convergence path in the medium term, thus supporting a positive

assessment. However, significant challenges remain, and policy discipline will need to be

maintained in a determined manner to fully exploit the benefits of participation in the euro area

and minimise risks to the convergence path going forward.

(

) Bourse Consult (2023),

‘Bulgaria:

Diagnostic of the State of the Capital Market’, Gap Analysis and Recommendations

Reports, August 2022 (https://reform-support.ec.europa.eu/publications-0/bulgaria-diagnostic-state-development-

bulgarian-capital-market-gap-analysis-and-recommendations_en).