UPDATE 1-Political uncertainty a key risk to Bulgaria outlook: IMF

Thu Jun 12, 2014 10:46am EDT

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BUCHAREST, June 12 (Reuters) - Domestic political uncertainty and its effects on reforms and investment remain key threats to a modest pick-up in Bulgaria's economic growth, the International Monetary Fund said, highlighting the fallout from the country's current crisis.

The Bulgarian government appears on the verge of collapse after the ruling Socialist party's poor performance in the European Parliament elections in May, and the country is expected to hold an early election by the end of this year.

That could undermine a pick-up in growth being driven by firming domestic demand and wider spending of funds provided by the European Union, the IMF said in a statement. The Fund expects the European Union's poorest member state to grow 1.6 percent this year, compared with 0.9 percent in 2013.

Bulgaria has been racked by political instability since early 2013, making it harder to cope with deep-rooted problems such as corruption, weak public services and a slow and inefficient judicial system. The previous government also collapsed in February last year after street protests.

"The effects of domestic political uncertainty on reform momentum and investment, as well as lingering uncertainty in the outlook for key euro area trading partners, remain key risks to the outlook," the IMF said in a statement on Thursday.

The Fund also cited Bulgaria's dependence on Russian energy supplies as a potential risk. Acrimonious talks between Russia and the Ukraine over gas prices could spark another energy war.

The country's small and open economy has struggled to climb return to the growth it saw before the global financial crisis began in 2008. Foreign investment has also fallen sharply and unemployment remains high.

The IMF, which has just finished a mission in Sofia, said significant risks remained to the government's revenue expectations. Restraint in spending was needed to maintain a budget deficit target of 1.8 percent of GDP, it said.

Longer term, the IMF also urged Bulgaria to address a temporary freeze in the country's retirement age, highlighting the "significant long-term public spending challenges" that would stem from an ageing and shrinking population.

"Accelerated growth, job creation, and income convergence with EU partners will require more rapid progress in addressing critical institutional and broader structural rigidities," the statement said.

"Key in this regard are efforts to strengthen human capital, address infrastructure gaps, increase the ease of doing business, and reduce corruption and cronyism, including through independent regulation and audit, as well as measures to reinforce the rule of law." (Writing by Matthias Williams; Editing by Larry King)

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