SOFIA (Reuters) - Bulgaria's economy is expected to rebound with growth of 4% this year and accelerating to 4.9% in 2022, the finance ministry said in its autumn macroeconomic forecast on Wednesday.
The small and open economy contracted by 4.2% in 2020 when the coronavirus pandemic hit jobs and businesses.
The ministry said strong domestic demand in the first half of 2021 has prompted it to increase its GDP growth forecast from an earlier estimate of 3.5%.
Strong public and private investment, bolstered by expected hefty inflows from the European Union's coronavirus recovery fund, and an improved economic environment will further boost growth in 2022, it said.
The economic recovery and high global oil prices are expected to boost inflation to 3.8% at the end of 2021, which should slow to 2% at the end of 2022, the ministry said.
Bulgaria pegs its lev currency to the euro under a currency board arrangement that prevents the central bank from setting interest rates and leaves fiscal policy as the main tool to influence the economy.
The Balkan country boosted spending to shield businesses and pensioners from the hit from the coronavirus crisis but also decreased the fiscal deficit target to 3.6% of GDP.
A new wave of the pandemic that triggers restrictions and a failure to efficiently tap the EU recovery funds would pose risks to the forecast, the ministry said.
Bulgaria, which is facing its third general election this year in November, is yet to submit its national plan to make use of over 6 billion euros in EU recovery grants.
(Reporting by Tsvetelia Tsolova; Editing by Toby Chopra)