Press Release No. 02/12

ANNEX

Recent Developments

Macroeconomic developments have been broadly favorable. Real GDP growth is estimated to have moderated to about 4.5 percent in 2001, as export growth decelerated with the slowdown in the European Union and the crisis in Turkey, and is projected to reach 4 percent this year. Inflation was low during 2001 at 4.8 percent and is expected to remain subdued this year. Unemployment leveled off at around 18 percent in 2001, while real wages increased by 4.5 percent in the first three quarters.

Competitiveness indicators remain adequate and the current account deficit, which increased to about 6.5 percent of GDP in 2001, is projected to narrow to below 6 percent in 2002-03 as a result of a recovery in exports and lower oil prices. The estimated widening of the trade account deficit from 10 percent of GDP in 2000 to 12 percent of GDP in 2001 is largely explained by the slowdown in exports of raw materials and in exports to Turkey and the EU. Bulgaria has established a good track record of macroeconomic stability in the context of a currency-board arrangement (CBA) supported by prudent fiscal policy. In response to the deteriorating current account balance, and given the still high debt-to-GDP ratios, the authorities tightened the fiscal stance in the last quarter of 2001. The growth in monetary and credit aggregates signals a further recovery in money demand and an improvement in lending to the private sector, in the context of a sound banking system. Despite the overall positive performance, several short-term risks and major reform challenges remain. In the short-term, slower-than projected EU growth, a reversal of the oil price decline, or insufficient foreign direct investment would increase external risks, requiring vigilance in policies to maintain macroeconomic stability. Over the medium term, Bulgaria needs to reduce unemployment and poverty, which remain above the first-tier EU accession country. It further needs to remove inefficiencies in the enterprise sector, a low level of financial intermediation, a burdensome bureaucracy, and improve governance.

Program Summary

The authorities' overall strategy to address the challenges is to continue with prudent fiscal and incomes policies in the context of the CBA, and advance the structural reform agenda. The authorities consider the CBA, which provides a stable nominal anchor and the discipline to maintain tight fiscal and incomes policies, the cornerstone of macroeconomic stability. The authorities are complementing these policies with an acceleration of structural reforms, including in the financial sector, labor markets, enterprise sector, and trade. These policies underlie the authorities' ambitious macroeconomic framework, targeting strong growth, low inflation, and declining current account deficits and public and external debt-to-GDP ratios.

The authorities' medium-term fiscal plan supports the CBA and promotes output growth. The authorities are committed to lower the budget deficit gradually from the targeted 0.8 percent of GDP in 2002 to balance in the medium term. This plan will allow to reduce pressure on the external accounts, channel savings to private investment, and decrease the public debt-to-GDP ratio. Within this framework, they are keen to continue to lower taxes on labor and capital while broadening the tax base and enhancing tax administration. The 2002 budget achieves a good balance between the need to lower tax rates and increase social spending within the budget deficit limit. The 2002-03 fiscal stance is fully consistent with macroeconomic stability. In 2002, while the overall deficit is targeted to decline, the primary surplus would be reduced from 3.0 percent of GDP in 2001 to 2.4 percent in 2002. To secure medium-term fiscal viability, the authorities are-in consultation with the World Bank-advancing the reform of the pension system and the health care and education sectors. The government is imposing hard budget constraints on municipalities to end the accumulation of arrears. It is keen to continue with administrative reforms that would improve revenue collection and enhance budget preparation and execution.

Among the structural reforms, the reform agenda in the enterprise sector is key to the authorities' plan to create a fully market-oriented and competitive economy. The incomes policy for the state enterprise sector and the minimum wage policy are crucial to guiding wage formation and improving the financial situation of state-owned enterprises. The program envisages measures to improve further the functioning of the labor market to bring down unemployment and safeguard the CBA. In regard to the financial sector, the authorities are committed to finalizing bank privatization, developing further financial intermediation and strengthening prudential supervision to support sustainable credit growth. They are also pursuing a more active debt management strategy. They are committed to accelerating long-delayed reforms in the energy sector, and are continuing the process of trade liberalization.

Bulgaria joined the IMF on September 25, 1990. Its quota¹ is SDR 640.2 million (about US$797 million), and its outstanding use of IMF resources currently totals SDR 844.1 million (about US$1.05 billion).