Press Release: IMF Approves Stand-By Credit and a Drawing Under the CCFF for Bulgaria

April 11, 1997

The International Monetary Fund (IMF) today approved credits totaling SDR 479.5 million (about US$657 million) for Bulgaria. Of the total, the equivalent of SDR 107.6 million (about US$147 million) is available under the cereal element of the Compensatory and Contingency Financing Facility (CCFF)1 because of increased import costs prompted by a significant decline in cereal yields and production during 1996/1997. A further SDR 371.9 million (about US$510 million) is available over the next 14 months under a stand-by credit to support the government’s economic program for 1997-98.


The IMF approved a 20-month stand-by credit on July 19, 1996, equivalent to SDR 400 million (about US$548 million), of which Bulgaria drew only SDR 80 million (about US$110 million--see 96/40). Delays in structural reform held up policy-based external financing and further eroded the confidence in the government’s ability to meet its external debt obligations, contributing to withdrawals from the banking system and pressure on the exchange rate and reserves. Real money demand continued to fall sharply, making it impossible to finance interest payments on domestic debt without recourse to central bank financing and acceleration of inflation. As the crisis deepened, the IMF staff, in consultation with the authorities, recommended a stabilization strategy based on a currency board arrangement. Although this idea gained broad support, progress was halted by the government’s resignation in December, a development that provoked a political stalemate and a further worsening of the economic situation. The depth of the economic crisis is apparent from the 9 percent fall in real GDP in 1996, the acceleration of 12-month inflation from 33 percent to 311 percent in 1996, and the decline in lev money demand by 63 percent in real terms.

The onset of the political crisis at the turn of the year compounded these developments and consumer price inflation in February reached a record high of 243 percent. The political stalemate was resolved in early February with the appointment of a caretaker government and the agreement among political parties to hold early elections on April 19. The caretaker government moved rapidly to alleviate basic food and fuel shortages and to begin stabilizing the economy with the announcement and implementation of a strong adjustment program. The first results are already apparent; inflation fell sharply in March to about 12 percent and the exchange rate has stabilized over the past few weeks after an initial appreciation.

The 1997-98 Program

The authorities’ program, supported by the new stand-by credit, represents a break withthe past and aims to restore confidence in public institutions and to put Bulgaria firmly on the path to a market economy. The basic strategy is one of rapid stabilization of the economy underpinned by durable structural reforms. Key to this strategy is the commitment to establish a currency board arrangement by mid-year. The program aims to limit the decline of real GDP to 4.8 percent in 1997, as growth turns positive by midyear; reduce monthly inflation to 2 percent by the end of the year; maintain a small surplus in the current account; and double official reserves to the equivalent of three months of imports of goods and nonfinancial services.

Fiscal policy has been designed to support the objective of rapid stabilization by cutting the overall budget deficit to 3.8 percent of GDP in 1997 from 10.9 percent of GDP in 1996 and by eliminating the need for central bank credit to the government. This will be accomplished through a major effort to strengthen revenues and rationalize expenditures, and an ambitious privatization program. Until the introduction of a currency board arrangement, monetary policy will by guided by monthly indicative targets, especially those for the central bank’s net domestic assets. For the next few months, given the considerable uncertainty, the authorities will maintain a flexible exchange rate regime.

Structural Reforms

Bulgaria aims to underpin its stabilization efforts and prepare for the adoption of a currency board with a comprehensive program of structural reform designed to strengthen the banking system, harden budget constraints on state-owned enterprises, and liberalize the economy, to provide the basis for development of a healthy private sector. In the banking sector, any remaining weak banks are being strengthened and supervision is being enhanced to ensure that the banking system is robust enough to function under a currency board arrangement. Other measures in this area include removing legislative and regulatory impediments to the privatization of banks, with the goal of privatizing them within two years. Financial discipline is being imposed on state-owned enterprises through privatization, liquidation and the implementation of financial recovery plans that combine administered price increases, cost-cutting measures and budgetary support to ensure the financial viability of enterprises. The authorities are committed to privatize all commercial enterprises and half of the country’s utilities within two years. The liberalization of the agricultural sector, by removing price controls and trade restrictions, and the removal of any remaining impediments to foreign direct investments are expected to contribute to the establishment of a private market economy.

Addressing Social Needs

The dramatic fall in real pensions and wages in the budgetary sector over the past six months has caused extreme hardship for large segments of the population. In the course of 1997, the government intends to restore wages and pensions to levels that meet the basic requirements of the recipients and to restructure the social safety net through consolidation of programs into a well targeted system of income transfers to the poor, old-age pensions, and unemployment insurance. A significant amount of foreign resources is explicitly targeted to increase spending in these areas.

The Challenge Ahead

Bulgaria should begin to reap some of the fruits of the shift to a market economy provided the currency board arrangement is supported by continuously cautious fiscal policies, vigilant banking supervision, and privatization of enterprises and banks. The room for policy slippages has been exhausted, however. It is therefore essential that the authorities stick with utmost determination to the path of stabilization and reform that they have laid out and resolve any problems through strongly implemented policies.

Bulgaria joined the IMF on September 25, 1990; its quota2 is SDR 464.9 million (about US$637 million); its outstanding use of IMF credit currently totals SDR 380 million (about US$520 million).

Bulgaria: Selected Economic Indicators






(Percent change)

Real GDP






Consumer prices (end of period)






(Percent of GDP)

Overall general government balance (deficit-)






External current account balance (deficit-)






Sources: Bulgarian authorities; and IMF staff estimates and projections.

1 The cereal element of the CCFF provides financing to member countries experiencing balance of payments problems caused by an excess in the cost of their cereal imports that is both temporary and beyond the control of the authorities.

2 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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