Public Information Notice: IMF Concludes Article IV Consultation with Bulgaria

April 19, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On March 31, 2000, the Executive Board concluded the Article IV consultation with Bulgaria.1


Under the currency board arrangement (CBA) introduced in mid-1997, Bulgaria has achieved macroeconomic stabilization and made substantial progress in structural reform. The CBA has been underpinned by a prudent fiscal policy: in 1998 the general government registered a small surplus, and in 1999 the deficit was limited to 0.9 percent of GDP. As a result, inflation has been brought under control. The CPI increased by only 1.8 percent (annual average) in 1999, and while higher energy and food prices have raised the year-on-year inflation rate to 9.1 percent in February 2000, average 12-month inflation remains low at 3.5 percent. Since the introduction of the CBA, two thirds of state assets outside infrastructure have been privatized, and the restructuring of large state monopolies in the utilities sector is underway. Loss-making state enterprises have been made subject to a strict incomes policy. Banking supervision has improved markedly. Four (out of seven) state banks have been privatized, and two more are on the market. The share of administered items in the CPI has been reduced sharply, trade has been liberalized significantly, and land restitution has been nearly completed. Many of the most significant advances took place in 1999, the year of the most intensive reform so far.

The authorities' strong efforts notwithstanding, the growth dividend from stabilization and reform has been slow in coming. True, after years of declining output, activity had rebounded in the second half of 1997 as the CBA-based policy framework restored credibility and sharply reduced inflation. The carry-over from this rebound helped GDP growth to reach 3.5 percent in 1998, the highest rate since the onset of transition. However, since the initial rebound and all the way through mid-1999, a series of adverse shocks kept GDP flat and put the external current account deficit on a rising path. Starting in 1998, export and activity suffered from a slowdown in partner countries and weak export prices as a result of the global financial crises. In March-June 1999, the Kosovo conflict blocked transit routes to western Europe, raising transport costs and causing further losses in exports. In 1999, Bulgaria also faced the strains related to the most intensive stage of privatization and restructuring: large inefficient enterprises in the traditional sectors were being phased out, and were only gradually being replaced by a dynamic private sector. The combined effect of these shocks was a sharp decline in exports (by one third between fall 1997 and spring 1999) and a marked worsening of the external current account deficit (from ½ percent of GDP in 1998 to over 7 percent of GDP in the first half of 1999).

With these shocks tapering off, the long-awaited recovery of output and exports got underway in the second half of 1999, suggesting a brightening of short-term prospects. By all indications, the economy hit the bottom during the Kosovo crisis. In the third quarter of 1999, GDP grew by 4.5 percent year on year, with a marked pick-up in services, robust agricultural output, and stable industrial production. For the full year, GDP growth is estimated at 2.5 percent. With a gradual recovery in exports and strong tourism receipts, the current account deficit was held to 5.4 percent of GDP in 1999. Data for the early months of 2000 suggest that the positive trend in exports and activity has continued, and for the year as a whole the authorities' targets of GDP growth of 4 percent and a current account deficit of no more than 4 percent of GDP appear well within reach. Export growth should reach double digits, boosted by a large carry-over from last year and a markedly better external environment than a year ago.

However, challenges remain:

  • Unemployment is high. Having declined to 12 percent in 1998, unemployment rose substantially during 1999, and reached 18 percent in February 2000. Poverty also remains widespread, especially among pensioners and in less developed regions.

  • There is a long remaining agenda to meet the criteria for EU accession, the government's key goal. Bulgaria's per capita income is the lowest among the 12 candidate countries, and many years of very rapid growth will be required for the country to catch up with even the middle-income countries in the group. Bulgaria also has some way to go in completing structural reforms to develop a fully competitive market economy. The state-owned sector needs a higher degree of financial discipline. Effective liquidation and bankruptcy procedures are still in the process of being put in place, slowing the exit of unviable enterprises. The emerging private sector also faces many obstacles, including burdensome bureaucracy and red tape, weak governance, and a banking system hesitant to extend credit. Bulgaria's sovereign credit rating remains well below investment grade, and cumulative foreign direct investment at less than US$200 per capita is low by regional standards.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for having implemented sound policies that had brought macroeconomic stability to Bulgaria and had helped the country weather last year's severe shocks. They observed that prudent fiscal and incomes policies as well as the acceleration of structural reforms had helped to curb the current account deficit, maintain competitiveness, and initiate a rebound in economic activity and exports. Looking ahead, Directors considered that the authorities' immediate challenge is to ensure that the recovery becomes self-sustaining and to reduce unemployment and poverty. For the longer term, Bulgaria's goal of EU accession will require rapid growth over many years and substantial further efforts to develop a fully competitive market economy.

Directors endorsed the broadly unchanged stance of fiscal policy in 2000. They noted that the 2000 budget allowed for a general government deficit of up to 1.5 percent of GDP, including transitional costs of structural reform, while providing margins to adjust the fiscal position if warranted by unforeseen developments. Directors underscored that, to preserve those margins, it would be important to exercise tight expenditure discipline, including in the municipalities.

Directors considered that the ongoing institutional reforms would lend important support to the efforts to achieve medium-term fiscal sustainability. They welcomed the recent initial steps to create a unified revenue agency to collect taxes and social contributions. Noting that, once fully operational, the new agency should help to promote good governance and enhance revenue collection capacity markedly, they urged the authorities to make every effort to ensure the success of this initiative. Directors also encouraged the authorities to complete expeditiously the treasury project which had already helped to strengthen budgetary control. Directors regarded the authorities' pension and health reforms as appropriately ambitious. While noting that adequate provisions had been made in this year's budget to cover the transitional costs of these reforms, they urged the authorities to be prepared to adjust the underlying parameters further as needed to preserve the long-term viability of the social security funds.

Directors stressed the importance of wage moderation and flexible labor markets for maintaining competitiveness and reducing unemployment. Noting the incipient export recovery and an improved external environment, they considered that present competitiveness was broadly adequate. Directors, however, emphasized that, to preserve competitiveness, real wage increases should be kept within productivity gains. In this regard, Directors supported the authorities' decision to continue wage bill freezes for the worst-performing state enterprises as well as state monopolies. They also considered that the moderation shown by the authorities in budgetary and minimum wage increases would help to contain wage demands in the private sector. To reduce labor market rigidities, Directors encouraged the authorities to ease restrictions on employment and working hours in the context of an amended Labor Code. They also urged the authorities to consider lowering the presently high social contribution rates in the medium term, noting that this should be possible provided the unified revenue agency succeeds in improving compliance, especially in the private sector.

Directors welcomed the progress made in improving banking supervision, but noted that the provision of bank credit to the private sector remained low. They considered that financial intermediation could be improved through selling the remaining state-owned banks to strategic investors, establishing a fully operational central credit registry, and strengthening the enforcement of contracts and legislation. Directors also endorsed the planned reduction in the minimum reserve requirement, considering that it, too, would help reduce interest rate spreads and maintain liquidity in commercial banks.

Directors observed that rapid progress in structural reform remained critical for Bulgaria's medium-term growth prospects. While noting that 1999 had been the year of the most intensive economic restructuring so far, with generally good progress in most areas, Directors urged the authorities to spare no efforts in continuing to implement strong initiatives on a wide front. They welcomed the authorities' intention to sell the remaining large-scale commercial state enterprises during 2000, emphasizing the importance of finding strong strategic investors and ensuring competition. While considering the adoption of the new Energy Law a major achievement, Directors stressed the need to implement the provisions of the law strictly and in a timely manner. In this context, they expressed concern about the authorities' plan to freeze the prices of electricity and district heating, noting that this could reduce the momentum of energy reform and create extra pressures on the budget. They called for the authorities to formulate and implement a plan for a fundamental restructuring of the district heating companies and the coal sector. Moreover, they urged further efforts to strengthen public administration, with a view to improving the delivery of public services and enhancing the capacity to implement an ambitious reform agenda.

Directors considered that the authorities' efforts to support private sector growth should be strengthened. They urged the authorities to implement as a matter of priority the recommendations of a high-level working group to reduce administrative inefficiencies. They also emphasized the importance of enforcing existing laws as well as private contracts, streamlining bankruptcy and liquidation procedures, and implementing accounting standards stringently to improve the business climate and governance.

Directors commended the authorities on their efforts to enhance transparency, including through publication of a Report on the Observance of Standards and Codes. They welcomed the fact that the authorities were already implementing the recommendations in the report, and encouraged them to continue. Directors also noted that, in recent years, Bulgaria had made good use of the extensive technical assistance provided by the Fund, and considered that Bulgaria deserved continued technical assistance support from the Fund in those areas in which the Fund had a comparative advantage. Regarding statistics, Directors welcomed Bulgaria's interest in participating in the General Data Dissemination System.

Bulgaria: Selected Economic Indicators

  1996 1997 1998 1999 2000 1/

Real economy
(Percent change)
Real GDP 2/ -10.9 -6.9 3.5 2.5 4.0
CPI, 12-month 310.8 578.5 1.0 6.2 3.5
Unemployment rate (percent) 12.5 13.7 12.2 16.0 ...
Public finance
(In percent of GDP)
General government balance -12.7 -2.5 0.9 -0.9 -1.4
Public debt 105.8 110.4 80.2 87.7 79.4
Money and credit
(Percent change, end of year)
Real broad money -45.4 -32.3 8.6 4.9 8.3
Real credit to the non-government sector -20.6 -56.0 5.3 3.4 11.3
Interest rates (annualized)
(In percent)
BNB basic rate (end-month average) 435.0 7.0 5.2 4.6 ...
Time deposits (end-month average) 213.8 3.0 3.3 3.2 ...
Balance of payments
(In millions of U.S. dollars)
Gross official reserves
(in months of GNFS imports)
Current account (percent of GDP) 0.2 4.4 -0.5 -5.4 -4.0
Trade balance (percent of GDP) 1.4 3.9 -3.1 -8.7 -7.0
Exchange rates          
Exchange rate regime
Currency board since July 1, 1997 3/
Present exchange rate (March 20, 2000)
2.0132 leva/U.S.$
Nominal effective exchange rate (1995=100) 4/ 56.9 5.6 5.4 5.8 ...
Real effective exchange rate (1995=100) 4/ 5/ 86.0 105.0 122.7 122.1 ...

Sources: Bulgarian authorities; and IMF staff estimates.

1/ Projection.
2/ The 1999 figure is an estimate.
3/ The currency board arrangement fixed the exchange rate at 1,000 leva=1 DM through end-1998 and 1,955.83 leva=1 euro since January 1, 1999. On July 5, 1999, the lev was redenominated by removing three zeroes. As a result, one lev now equals one deutsche mark.
4/ Annual average level.
5/ CPI-based.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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