John Lipsky, the International Monetary Fund's first deputy managing director, urged Bulgaria to continue cutting spending to ensure the economy expands enough to raise living standards in the European Union's poorest nation, reported Bloomberg.

Lipsky said in Sofia today that continued ``tight fiscal policy'' will help attract more of the foreign investment that fueled economic growth to 6.1 percent last year.

Bulgaria sold the Jan. 1 EU entry on promises that membership will drive up wages and investment further and help the Balkan nation's economy catch up with other EU countries. Gross domestic product in the 13-nation euro zone, where 60 percent of Bulgarian goods are sold, expanded 3 percent in the first quarter, compared with 2.4 percent in the same quarter a year earlier.

``The present benign international economic environment is an ideal context in which to continue fiscal consolidation,'' Lipsky said at a news conference in Sofia today. ``Significant improvements in the standard of living for the entire population can only be achieved if the economy can grow over many years.''

Lipsky also said the inflation rate, at 4.2 percent in April, will stay below 4.5 percent this year, lower than the IMF's May 7 forecast for a 4.6 percent inflation rate in 2007.

``The combination of strong growth and slowing inflation is a favorable outlook,'' he said. The IMF's Bulgarian economic growth forecast remains at 6 percent for this year, he said. Record levels of foreign investment of $5.2 billion last year, fueled growth in the $31.5 billion economy.

Bulgaria seeks to join the exchange-rate mechanism, a two- year test of currency stability, this year. The nation meets all the requirements for euro adoption except inflation.

Its 12-month average rate must be within 1.5 percentage points of the average of the three EU states with the slowest inflation. Last month, that limit was 3 percent.

Bulgaria's lev is fixed to the euro under a currency board system, which bans central bank lending and has helped the country keep a lid on spending and lower public debt to 22 percent of gross domestic product, below the 60 percent of GDP criteria required for euro adoption.

``If policies remain consistent with successfully sustaining the currency board, the move into ERM-2 shouldn't pose any strains on the policy or the economy,'' Lipsky said. ``Looking beyond the exchange-rate mechanism, the currency board creates the possibility for a smooth move toward euro-adoption, when and if that becomes appropriate.''

Finance Minister Plamen Oresharski said at the conference that the government is having informal consultations with representatives of the European Commission and the European Central Bank. On May 15, Oresharski extended the country's target date for adopting the euro to between 2010 and 2015.

Lipsky confirmed the IMF's forecast for a current-account deficit of 16.6 percent of gross domestic product.

The large current-account deficit reflects the strong inflow of foreign capital, which helps fund investment expenditures,'' Lipsky said. ``It is an important element in sustaining economic growth.''

It was important for foreign investors not to lose confidence in ``the predictability, responsibility and prudence of government policies,'' Lipsky said.

``The loss of confidence will do much more to damage the prospects of Bulgarian prosperity than any short-term sacrifice in prudent policies,'' he said, warning the government to be cautious in raising wages and avoid raising inflationary pressure.

Bulgaria retired early all outstanding debt to the IMF on April 24, which ended its program with the Fund.