The short-term forecast in the Annual Report of ERI at BAS is for GDP to grow at a rate of around 2.5-3.5% per year, driven mainly by European investment and domestic consumption.

Inflation in Bulgaria in the past 2024 slowed down to 2.2% which brought our country closer to meeting the Maastricht criteria for euro area membership. This is stated in the regular Annual Report “Economic Development and Policies in Bulgaria: Evaluations and Prospects“ of the Economic Research Institute (ERI) at the Bulgarian Academy of Sciences.

The report examines the state and development of the global and national economy in 2024 and presents projections for economic development over the medium term to 2027. According to it, inflation continues to be distinctly stimulated by the growth of administrative prices as well as by the moderate growth of transport prices. Inflation is also notably affected by continued significant wage increases, which, in the face of weak labour productivity gains, leads to accelerated real wage growth. This has a depressing effect on aggregate supply, generating inflationary impulses from production costs, according to the BAS economists.

In 2024, the labour market remained relatively calm and was characterised by an increasing economic activity rate reaching 74%. However, in Bulgaria it continues to be marked by clear regional disparities related to the size and structure of the labour force as well as employment and unemployment rates. Another problem was the limited readiness of the Bulgarian labour market for digital transformation which stemmed from the low share of digitally-skilled people and the low penetration of technology in enterprises.

With a budget deficit on an accrued basis of 3% of GDP and a consolidated government debt of 24.1% of GDP in 2024 – with benchmarks of 3% and 60% of GDP respectively, Bulgaria met the EU’s Maastricht deficit and debt criteria. After joining the euro area, an important change in the state budget will be the country’s contribution to the capital of the European Stability Mechanism which is expected to amount to BGN 1.1 billion and to be payable in equal annual instalments over the first 5 years of joining the euro area.

A new element in the fiscal framework for the period 2026-2029 will be the increase in defence spending with a derogation for its reporting under the Stability and Growth Pact. With insignificant disbursements under the Recovery and Resilience Facility and non-receipt of the second and third tranches of the NRRF, there is a risk of an increase in the consolidated government debt and an increase in dependence on financing from international capital markets, according to the BAS economists.

Relatively slowed economic development of the leading trading partners and disinflationary processes in the global economy had a direct impact on Bulgaria’s foreign trade in 2024 and outlined the prospects in 2025. Exports of finished industrial components and subsystems highlighted the strong dependence on the state of the German economy to which over 22% of total exports of machinery, equipment and vehicles from Bulgaria in 2024 were directed. Bulgarian exports of goods to the U.S. fluctuated between 2 and 2.5% of total exports in the period 2018-2024 and far outstripped imports of US goods, which accounted for approximately 1% of the country’s total imports of goods. Assuming that the 20% ad valorem duty on imports from the EU to the US is maintained, the subsequent direct effect of lower demand for European goods due to their price increase and the absorption of losses by Bulgarian producers can be estimated at 0.2% of GDP or around BGN 420 million.

The most likely medium-term consequence of the US aggressive trade protectionism and the global uncertainty is global stagflation which will have a stagnating effect on Bulgarian exports both in terms of the strong orientation and integration towards the euro area and directly in foreign trade relations with the US.

In 2024, the banking sector will continue to operate in an unsustainable environment conditioned by the disruption and redirection of some supply chains as a result of the sanctions imposed against Russia in connection with the military conflict in Ukraine. Amid the growing uncertainty, Bulgarian banks continue to be resilient, profitable, maintaining high levels of liquidity and capital buffers amid intense lending rates, weakening rates of both revenue and core banking costs, sharp increases in depreciation expenses and moderate growth in provision accruals.

In 2024, the profit of the banking sector reached a record value of BGN 3.7 billion – 8% above the level achieved in 2023. The comparison with interest rates in the euro area showed that almost all CEE countries that had adopted the euro – Lithuania, Latvia, Estonia, Slovenia, Slovakia and Greece – had higher interest rates for corporate clients than Bulgaria. The average interest rate on home loans in Bulgaria is lower than in all euro area Member States except Malta which forms the expectation of a possible increase after the euro adoption date.

The short-term forecast of ERI at BAS is GDP to grow at a rate of around 2.5-3.5% per year, driven mainly by European investment and domestic consumption, provided that the global and European economic environment does not deteriorate sharply. Domestic consumption is expected to remain relatively stable, underpinned by persistently low unemployment and income growth that is likely to slow in comparison to previous years. Declining inflation could also support purchasing power. Despite the serious challenges of the global trade wars, some recovery in exports is expected as a result of the dynamic development of the services sector, the implementation of the rearmament programme and the advantages Bulgaria is realising in military exports as well as the effects of joining the euro area. Achieving political stability, the efficient and rapid absorption of the funds under the NRRF and cohesion programmes, the acceleration of structural reforms and active labour market policies, and the overcoming of demographic problems are key to the successful integration of the Bulgarian economy into the euro area.

The recommendations made to the economic policy in the country are aimed at successfully integrating the Bulgarian economy into the euro area, stimulating investment activity, activating the inactive working-age population, implementing fiscal consolidation and developing the potential of foreign trade relations, and preserving the stability of the financial sector.

The focus topic analyses and assesses the challenges facing the Bulgarian electricity sector from EU energy and climate policy and initiatives. It analyses the specificities of electricity consumption in Bulgaria showing that the Bulgarian economy is energy intensive – with a level of energy intensity above the EU average which is a consequence of 3 main factors. The first is related to the structure of industry which is dominated by manufacturing and extractive industries, followed by per capita electricity consumption which lags significantly behind the EU average, and as a third reason – electricity transmission and distribution losses which are significant although decreasing and approaching the EU average.

In conclusion, the BAS economists believe that since the EU electricity market model has not met the expectations for increasing the welfare of people and the competitiveness of industry, Bulgaria’s request to keep TPP until 2038 and to accelerate the construction of the two new nuclear units of Kozloduy NPP is justified.

The full text of the ERI-BAS Annual Report 2025 can be found at the following link: https://www.iki.bas.bg/files/Doklad_2025_color-cut.pdf.