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Simeon Djankov in an interview for Reuters

   * Fiscal performance better than expected in Jan, Feb
   * Expects 4.1 percent growth in 2012
   * Plans to buy back debt to save interest rate payments
   By Tsvetelia Tsolova and Sam Cage

SOFIA, Feb 21 (Reuters) - Bulgaria's economic recovery should accelerate through this year and next, allowing it to cut the budget deficit below the current target and easing the need to raise debt, its finance minister told Reuters.

The economy, which barely grew in 2010 after a deep recession, is forecast to expand by 3.6 percent this year and 4.1 percent in 2012, Simeon Djankov said in an interview.

The European Union's poorest member is also one of the least indebted and, unlike neighbouring Greece or Romania, has returned to economic growth without significantly raising taxes or boosting public debt.

The government has a budget gap target of 2.5 percent of gross domestic product for this year but should be able to bring it down below that level.

"We aim for a lower deficit," Djankov said. "For 2011, I expect better than planned performance and the result in January and February points to that direction."

Austerity cuts, delayed reforms and a recent bugging scandal which raised suspicions of high-level favouritism have eroded support for the minority centre-right government, but it still has a solid grip on power thanks to backing of the nationalist Attack party.

Djankov said recovery should be underpinned by returning domestic demand, growing exports and investment in construction, boosted by EU-backed infrastructure projects.


Bulgaria's lev currency is pegged to the euro, which restricts monetary policy and means low deficits are needed to limit risks to the peg.

Bulgaria has dropped plans to issue a Eurobond this year and is now planning to buy back some debt on domestic markets to cut the amount of interest it has to pay and could consider extending the scheme to international debt, Djankov said.

The finance ministry had previously ruled out a Eurobond in the first quarter, but said it could issue one later in 2011.

"It turns out we do not need additional funding this year at the Eurobond market. We have sufficient fiscal reserves to last us through 2011 certainly and may be 2012," Djankov said. "We have started actually last week doing some buybacks at the domestic market just to see how flexible the system is and how it operates coming out of the crisis."  

The average annual yields on 10-year bonds issued on the domestic market in 2002 and 2003 range between seven and eight percent, finance ministry data showed. "The buybacks, put together with more active policy at the domestic market this year, may actually reduce the overall burden on the budget from interest rate payments," Djankov said.

Djankov, who will propose constitutional changes this week to bridle the fiscal deficit and public spending, said ensuring long-term fiscal prudence was on the top of his agenda for this year and not euro currency adoption. 

He said Bulgaria may start talks with Brussels this autumn about entering the ERM-2 mechanism, the two year obligatory waiting room for euro hopefuls, but added the country does not have a target date for adopting the shared currency.

(Editing by Ruth Pitchford)

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