Public Information Notice: IMF Concludes Article IV Consultation with Bulgaria

April 3, 2001

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 23, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1


Bulgaria has come a long way in three years. Having fallen by more than a third between 1989 and 1997, real GDP has since increased by 11 percent, inflation has been brought under control from near-hyperinflationary levels in 1996-97, and external debt has declined from nearly 100 percent of GDP in 1997 to about 80 percent now. This outcome has been facilitated by prudent fiscal policy, which has kept the general government position in approximate balance, and a strict incomes policy for state enterprises, subjecting the worst-performing firms to wage bill freezes. Bulgaria's currency board arrangement continues to have broad political and public support, and shows no signs of strain, as interest rates are low and stable, fiscal reserves ample, and banks liquid. An ambitious structural reform agenda has also been implemented quite successfully. Starting from almost scratch, in three years over one half of enterprise assets and four fifths of bank assets have been privatized. In addition, the authorities have improved banking supervision, started the overhaul of the pension and health care systems, and liberalized trade and prices. Less progress has been made in reducing inefficiencies in the enterprise sector, restructuring the energy sector, and improving the business climate.

Policy performance remained strong in 2000, albeit with some slowdown in structural reform. Fiscal policy continued to be prudent, with the general government deficit contained to 1 percent of GDP in 2000, and state enterprises maintained wage discipline. Major advances were made in structural reforms, although toward the end of the year signs emerged of a slowdown in sensitive areas: the submission to parliament of amendments to the Energy Law (to create an efficient and competitive energy sector) was delayed by six months, and the parliamentary approval of amendments to the Labor Code (aimed at making wages and employment more flexible) was delayed by nine months, both to March 2001. Moreover, while an amended Privatization Law aimed at increasing transparency was approved expeditiously in November 2000, new strategies to sell the telecommunications and tobacco monopolies have yet to be put in place.

As regards the recent macroeconomic situation, GDP growth in 2000 is estimated at 5 percent, slightly better than targeted, with net exports and domestic demand contributing roughly equally. Although inflation rose to above 11 percent by end-2000, this mainly reflected temporary factors, including high international energy prices and a drought. In fact, by February 2001, inflation receded to 8.5 percent. Competitiveness seems to remain adequate, as evidenced by the rapid growth of exports, a stable real effective exchange rate, and sharply lower unit labor costs, stemming from productivity gains as a result of restructuring and investment. The current account deficit amounted to 5.8 percent of GDP in 2000, roughly the same as in the previous year, as increased receipts from exports and tourism offset the impact of a sharp rise in energy imports. The record-high foreign direct investment easily covered the current account gap, and gross official reserves rose to US$3.5 billion at end-2000, providing reserve cover of over five months of imports of goods and nonfactor services. The contagion from financial turmoil in Turkey and Argentina has been limited.

Despite the encouraging developments, challenges remain. First, unemployment remains high at over 18 percent, in part owing to labor shedding related to restructuring. Second, Bulgaria is still far from its goal of EU accession. To reduce unemployment and join the EU, the authorities need to remove major structural obstacles to growth and a fully competitive economy. The bottlenecks include: inefficiencies in the enterprise sector, owing to the large share of insider deals in privatization and slow exit procedures; a low level of financial intermediation; the high energy intensity of production, stemming from an exceptionally high reliance on energy under central planning and a slow start in restructuring the energy sector; and burdensome bureaucracy and red tape.

Executive Board Assessment

Executive Directors commended the authorities on the turnaround in economic performance that has been achieved under their three-year Fund supported program, reflected in higher growth, a sharp drop in inflation, and containment of the external debt.

Directors credited these results in large part to the success of the currency board arrangement, supported by tight fiscal and incomes policies and generally good progress in implementing a broad structural reform agenda. However, Directors noted the scale of what remains to be done to create a dynamic market economy, to reduce unemployment, and to meet the conditions for accession to the European Union. To meet these challenges, it will be vital that the authorities maintain their prudent macroeconomic policies and push firmly ahead with the structural reform agenda.

Directors expected economic performance to continue to improve in 2001, provided there are no policy slippages in the roundup to the midyear general elections, and downside risks do not materialize. These risks include the possibility of a sharper-than-projected slowdown in the industrialized economies and possible adverse movements in energy prices.

Directors considered the 2001 budget stance to be appropriate but suggested that the authorities be prepared to tighten fiscal policy in the event of unanticipated upward pressure on inflation or the external current account deficit. They welcomed the substantial cuts in income and social security tax rates in the budget. Directors urged the authorities not to frontload expenditure in the pre-election period, and to use the one-time proceeds from the sale of the second GSM license and from bank privatization to reduce the public debt and not to raise spending. To provide the basis for a continuing sound fiscal policy in the medium term, Directors encouraged the authorities to maintain their efforts to establish a fully functioning treasury and a unified revenue agency, and to complete the health care and pension reforms.

Directors emphasized that the upcoming elections should not undermine the momentum of the structural reform program, the overall aim of which is to open opportunities for further private sector growth and to enhance the economy's competitiveness and flexibility. They noted that unemployment was high and, for both economic and social reasons, urgently needed to be reduced. They considered that a further substantial reduction in the tax on labor income would be important in this regard, provided that the tax base is widened and the tax and social security administrations are strengthened so as to minimize the revenue loss. Directors also endorsed the strict incomes policy currently being pursued in the state enterprise sector, as well as efforts to increase labor market flexibility and improve the business environment so as to allow the private sector to become a more powerful generator of employment opportunities than hitherto. They welcomed the recently approved amendments to the Labor Code that allow more flexibility in employment and working hours, the intention to further streamline the business licensing regime and introduce a "one-stop shop" system for investors to reduce bureaucracy, and the drafting of an international arbitration law. Directors considered that these measures and, more generally, steps to improve governance would be helpful in creating an attractive environment for foreign direct investment, on which the success of the authorities' efforts would heavily depend.

While Directors considered the banking sector to be generally sound, they were concerned that significant problems still exist for a number of smaller banks, and that credit to the private sector remains low. They stressed the need to further strengthen bank supervision and to improve corporate governance, and enforce creditors' rights to reduce the perceived risks of lending to the private sector. Directors cautioned against further reductions in the reserve requirement at this stage, in view of the risk that banks would withdraw the added liquidity in foreign exchange deposits.

Directors identified other main reform priorities as completing privatization in a rapid and transparent manner, making the energy sector more competitive and efficient, and liberalizing trade further. They considered it vital for pending legislation on key measures to be approved by parliament before the end of its current session. Amendments to the Energy Act that would establish a competitive and efficient energy sector were particularly important in this regard. Directors stressed the importance of finalizing the long-delayed sale of Biochim bank and relaunching the sales of the telecommunications and tobacco companies.

Directors commended the authorities for the significant advances in trade liberalization, noting that nontariff barriers have been eliminated and the average tariff rate lowered. They considered that major benefits would result from further tariff liberalization as the tariff regime remains complex and dispersed, and the average tariff is still high.

Directors welcomed the authorities' continued efforts to enhance transparency and observe international standards and codes, and noted the update to the Report on the Observance of Standards and Codes. They also commended the authorities on participating in the General Data Dissemination System and on taking steps towards subscribing to the Special Data Dissemination Standard.

Bulgaria: Selected Economic Indicators

  1997 1998 1999 2000 2001 1/

Real economy (Percent change)
Real GDP 2/ -7.0 3.5 2.4 5.0 5.0
CPI, 12-month (end of period) 549.2 1.7 7.0 11.4 4.5
Unemployment rate (percent) 14.0 12.4 13.8 18.1 16.3
Public finance (In percent of GDP)
General government balance -2.5 1.0 -1.0 -1.0 -1.5
Public debt 110.4 80.2 86.7 80.6 66.6
Money and credit (Percent change, end of year)
Real broad money -32.3 8.6 4.9 5.2 10.0
Real credit to the non-government sector -53.6 5.3 13.6 5.0 15.0
Interest rates (annualized) (In percent)
BNB basic rate (end-month average) 7.0 5.2 4.6 4.7 ...
Time deposits (end-month average) 3.0 3.3 3.2 3.3 ...
Balance of payments (In millions of U.S. dollars)
Gross official reserves 2,474 3,056 3,222 3,460 3,636
(in months of GNFS imports) 5.2 6.1 5.9 5.4 5.5
Current account (percent of GDP) 4.4 -0.5 -5.2 -5.8 -4.4
Trade balance (percent of GDP) 3.9 -3.1 -8.7 -9.7 -8.0
Exchange rates          
Exchange rate regime Currency board since July 1, 1997 3/
Present exchange rate (March 15, 2001) 2.1578 leva/USD
Nominal effective exchange rate (1995=100) 4/ 5.5 5.4 5.8 5.9 ...
Real effective exchange rate (1995=100) 4/ 5/ 102.6 116.4 118.7 120.0 ...

Sources: Bulgarian authorities; and IMF staff estimates.

1/ Projection.
2/ The 2000 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.

1 Under 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. This PIN summarizes the views of the Executive Board as expressed during the March 23, 2001 Executive Board discussion based on the staff report.


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