UPDATE 1-IMF urges Bulgaria to keep fiscal deficit, debt in check

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SOFIA, Sept 16 (Reuters) - Bulgaria’s better-than-expected economic growth will allow it to cut its fiscal deficit to 0.8 percent this year, the International Monetary Fund said on Friday, opening the way for further fiscal consolidation in 2017.

The IMF, which carried out a 10-day staff visit to the Balkan country, said Sofia also needed to keep its public debt in check to protect its lev currency peg to the euro and avoid further pressure on its state finances.

“There has been recent fiscal overperformance and it is welcome... For 2017, our view is that the budget should continue the consolidation trend on an accrual basis,” IMF mission chief to Bulgaria, Reza Baqir, told reporters.

Finance Minister Vladislav Goranov said earlier on Friday that Bulgaria’s fiscal shortfall has fallen below 1.0 percent of GDP this year from an initial target of 2 percent, which should help Sofia run a balanced budget in 2018.

Baqir said the cash deficit of the European Union country next year may be slightly higher than the one in 2016, but stressed that the centre-right government should work to keep spending at bay.

Sofia operates under a currency board arrangement that significantly curtails the central bank’s monetary operations, leaving the fiscal policy as its main tool to influence the economy and protect the currency peg from external risks.

The IMF increased its forecast for economic growth to 3.0 percent this year from a previous 2.3 percent due to improving private consumption.

It said Bulgaria needs to take steps to combat high-level corruption, improve its labour market and reform the judiciary to attract investors and speed up convergence to EU’s average living standards.

IMF’s Baqir said recent health-checks on Bulgarian banks were a step to improve confidence in the sector after the collapse of Bulgaria’s fourth largest lender in 2014, and urged strict supervision on lenders that needed to boost capital buffers and intervene if they fail to do so. (Reporting by Tsvetelia Tsolova)