Press Release: IMF Staff Statement at the Conclusion of a Mission to Bulgaria

April 13, 2004

The following statement was issued today in Sofia by an International Monetary Fund (IMF) staff mission to Bulgaria between March 25 and April 13, 2004 led by Mr. Hans Flickenschild:

"Over the past three weeks, the IMF mission held constructive discussions with the Bulgarian authorities, civil society, and the business community. We thank the Bulgarian authorities and other counterparts for their cooperation and hospitality.

"The mission carried out four main tasks: (a) discussion of a draft Ex Post Assessment (EPA) paper prepared by the IMF staff examining Bulgaria's program involvement with the IMF, (b) regular discussions of economic performance and policies as required for all member countries under Article IV of the IMF Articles of Agreement, (c) discussions regarding a possible follow-up precautionary IMF-supported program, and (d) updating the joint IMF/World Bank assessment of the financial sector of the economy, originally prepared in 2001/02. During the discussions, the authorities' program and policies for the next two years have been identified, and will be presented to the Executive Board in a joint Article IV and EPA meeting, expected to take place in early June. The discussions on a successor arrangement can be finalized only after the Board discussion of the EPA. The need for a follow-up mission to complete program discussions will be assessed in light of this Board meeting, with the new arrangement expected to be in place by end-July.

"Macroeconomic developments remain broadly favorable. Robust real GDP growth and moderate inflation are expected to continue into 2004, with industry and services continuing their strong performance and the agriculture sector rebounding from last year's drought. Unemployment has declined substantially over the past year. A sound fiscal policy has underpinned this economic performance.

"However, the external risks identified during previous missions have intensified. The current account deficit has continued to widen, reaching 8½ percent for 2003 as a whole, and the related rapid growth of bank lending—at an annual rate of around 50 percent—has not abated. At this stage, there appears to be little threat to the stability of the financial system from these developments, given strong supervisory practices of the Bulgarian National Bank (BNB) and banks' strong financial positions. Nevertheless, the heightened macroeconomic risks require appropriate responses from the authorities.

"The mission agrees with the authorities' strategy to address these risks. This strategy is based on three pillars: fiscal adjustment and bank liquidity reduction to restrain demand, and structural reforms to enhance supply. The mission supports the government's decision to tighten the fiscal stance in 2004 by limiting the general government deficit (treating capital transfers as expenditure) to no more than ½ percent of GDP. We concur with the proposed measures to drain liquidity from the banking system and to further strengthen the already-strong supervisory and regulatory policies of the BNB. We also commend the government's commitment to continue major privatizations, enact legal and other reforms to improve business climate and governance, and take steps toward a more flexible labor market."


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