UniCredit Bulbank Forecasts Stable Growth as Bulgaria Prepares for Euro Adoption

Jerusalem, 31 July, 2025 (TPS-IL) -- Sofia (BTA) – Bulgaria will become the newest member of the eurozone on January 1, 2026, with the economy in a strong position on the threshold of adopting the euro, without significant macroeconomic imbalances, if high levels of income inequality and the share of people at risk of poverty and social exclusion are excluded. This is stated in the macroeconomic review of “UniCredit Bulbank” for the third quarter of this year, authored by Kristofor Pavlov, the bank’s chief economist, and Elena Kostadinova, senior economist.

The outlook for gross domestic product (GDP) growth remains favorable on the back of strong domestic demand, which continues to be supported by rapid growth in income and credit for Bulgarian households.

According to the bank’s baseline scenario, consumer price inflation is expected to begin to ease in the remaining months of this year and further into next year. This will be supported by the government’s information campaign regarding the adoption of the euro on 1 January 2026, which should help to calm inflationary expectations, as well as regulatory measures aimed at reducing attempts by unscrupulous traders to speculatively increase the prices of products and services.

The main risk to the bank’s positive scenario remains political stability. A government collapse and new elections at the end of this year or early next year would undermine the efforts of the institutions responsible for introducing the euro, including successfully addressing public concerns that unless vigorous measures are taken against speculation, the adoption of the euro could be accompanied by a rise in inflation, the analysis says.

UniCredit Bulbank is raising its GDP growth forecast for this year by 0.1 percentage points to 3.2 percent compared to the previous edition of its macroeconomic forecast. “In our new forecast, we expect stronger growth in private consumption and investments. The positive effect of the increased forecast for private consumption and investments will be partially offset by weaker exports, which will increase the negative contribution to net export growth, compared to our forecast from three months ago, compared to 3 percent, indicated in the previous edition of the bank’s macroeconomic forecast,” the bank said.

The GDP growth forecast for 2026 and 2027 is 3 percent and 2.8 percent, respectively. In the previous edition of the forecast, the bank expected growth of 3.3 percent and 2.7 percent.

Annual inflation, calculated according to the national methodology (CPI), reached 4.4 percent in June, which is the highest value observed since December 2023, the analysis says. The largest contribution to the increase in consumer price inflation since the beginning of the year was made by food prices. The accumulated food inflation in Bulgaria since the beginning of the year reached 5.2 percent, which is the third highest value recorded among all member states of the European Union.

The bank’s baseline scenario foresees consumer price inflation starting to ease in the second half of this year and further into next year. This will be supported by the expected good agricultural harvest in 2025, as well as the government’s ongoing information campaign regarding the adoption of the euro on 1 January 2026, which should help to calm inflation expectations and reduce speculative price increases for products and services.

The main risk to a positive inflation scenario remains political stability. A government collapse and new elections at the end of this year or early next year would undermine the efforts of the institutions responsible for introducing the euro, including successfully addressing public concerns that unless vigorous measures are taken against speculation, the adoption of the euro could be accompanied by a rise in inflation, the analysis says.

The country’s budget envisages an increase in tax and social security revenues from 28.9 percent of GDP in 2024 to 32.7 percent of GDP in 2025, which corresponds to a growth of as much as 3.8 percent. The elimination of the reduced VAT rate for bread, flour and some tourist services, in combination with higher excise duties on tobacco and tobacco products and increased revenues from the toll system are expected to contribute to an increase in fiscal revenues by an amount corresponding to about 0.5 percent of GDP, the analysis says.

The remaining additional tax and social security revenues, amounting to as much as 3.3 percent of GDP, are expected to come from government measures to reduce the shadow economy.

According to the bank, this policy choice is correct because Bulgaria has a large gray sector. Depending on the methodology used, the gray sector is estimated to be between a quarter and a third of the country’s economy. If part of this turnover is covered, given that the tax and social security burden is around 30 percent, there is a great potential for increasing revenues.

In practice, the target of a 3.3 percent increase in tax and social security revenues indicates that the government is setting itself the task of generating revenues corresponding to about 11 percent of the country’s GDP, the analysis says.

In its budget execution forecast, the bank assumed that the government would achieve two-thirds of its target. Bulgaria is expected to exceed the deficit by up to 1 percent of GDP for defense investments, without triggering an excessive deficit procedure, due to prior approval from the European Commission. This would bring the deficit on an accrual basis to 4 percent of GDP, while for the purposes of the Stability and Growth Pact (SGP), the reported deficit in 2025 would remain at 3 percent.

After a long period in which basic taxes remained unchanged, Bulgaria appears close to seeing an increase in basic taxes, the bank said, predicting a cumulative increase in pension contributions by 3 percent in 2027 and 2028.