Convergence reports recently released by the European Commission (EC) and the European Central Bank (ECB) say that Bulgaria shows considerable nominal convergence and fulfils all of the convergence criteria, except for the exchange rate criterion as it is not a member of the Exchange Rate Mechanism (ERM II). The reports cover the seven non-euro area EU Member States that are legally committed to adopting the euro: Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden.
The seven countries under review in these reports have been examined as part of a regular two-year cycle and both reports are being submitted to the EU Council in parallel.
The convergence criteria include price stability, sound public finances, exchange rate stability and convergence in long-term interest rates.
In March 2018, the 12-month average rate of inflation in Bulgaria was 1.4 per cent, i.e. below the reference value of 1.9 per cent for the criterion on price stability. Bulgaria's general government balance and debt complied with the Maastricht criteria in 2017. Bulgaria faces low risks to fiscal sustainability over the medium and long run, partly as a result of its favourable initial budgetary position.
The reports point out that in the two-year reference period from 4 May 2016 to 3 May 2018, the Bulgarian lev did not participate in ERM II, but its exchange rate was fixed at 1.95583 levs per euro within the framework of a currency board.
Over the reference period from April 2017 to March 2018, long-term interest rates in Bulgaria stood at 1.4 per cent on average and were thus below the 3.2 per cent reference value for the interest rate convergence criterion.
The ECB says, however, that the quality of institutions and governance is relatively weak in all countries under review except Sweden. "This can pose risks for economic resilience and the sustainability of convergence. Specific institutional indicators broadly confirm an overall picture of weak quality of institutions and governance in most of the countries," reads the report. "In particular, Croatia, Bulgaria, Romania and Hungary have the lowest quality of institutions and governance among the countries under review."
The reports also say that Bulgarian law does not comply with all the requirements for central bank independence, the monetary financing prohibition, and legal integration into the Eurosystem.
"In order to further bolster confidence in the financial system, the national competent authorities should continue to improve their supervisory practices, among other things, by following the applicable recommendations from the relevant international and European bodies, and by collaborating closely with other national supervisors of EU Member States within the supervisory colleges," the ECB says.
The reports conclude that achieving an environment that is conducive to sustainable convergence in Bulgaria requires stability-oriented economic policies and wide-ranging structural reforms.