Public Information Notice: IMF Concludes Article IV Consultation with Bulgaria

March 10, 1999

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 February 19, 1999, the Executive Board concluded the Article IV consultation with Bulgaria.1


At the time of the 1997 Article IV consultation, the Bulgarian economy had begun to recover from a severe banking and currency crisis that was rooted in lack of progress with structural reform during the transition. The newly elected reformist government had adopted a currency board arrangement and initiated an ambitious stabilization and reform program supported by a stand-by arrangement (SBA). Perseverance with implementation of the program, including a very cautious fiscal stance and an acceleration and deepening of reforms, restored confidence in policies and achieved impressive stabilization results much sooner than expected, with outcomes for 1997 better than programmed. Realizing that much of the transition towards a competitive market economy still lies ahead, the authorities are implementing a comprehensive medium-term economic adjustment and reform program in the context of Bulgaria’s EU accession strategy. In September 1998, the Executive Board approved a request for a three-year extended arrangement in support of the program.

During 1998, a continuation of prudent policies underpinned generally favorable economic developments despite the adverse effects of the Asian and Russian crises. Bulgaria has been affected mainly through reduced foreign demand and prices for key exports (particularly chemicals, fertilizers, and metals), waning investor interest in emerging markets, and a higher risk premium on Bulgaria foreign debt, which postponed a Eurobond issue. On the positive side, Bulgaria’s highly open economy has benefited from lower import prices, particularly for energy, and lower interest payments on external debt.

Macroeconomic developments have been broadly in line with the program. Following a crisis induced decline in the two previous years, real GDP is expected to grow by 4–5 percent in 1998, but this largely reflects the carry over effects of the rebound in economic activity during 1997, and available indicators point to a deceleration of growth in the second half of the year. Inflation was only 1 percent (end-year) during 1998, well below the program target (9 percent), owing mainly to declining international prices and abundant domestic food supplies; this helped limit real currency appreciation. With the recovery of the economy and slower growth abroad, as anticipated, the external trade and current account balances shifted from large crisis-induced surpluses in 1997 to modest deficits in 1998. For 1998, a current account deficit of about 1 percent of GDP is projected. On capital account, foreign investment inflows, which were substantial in 1997, declined as privatization slowed, but this was more than offset by official balance of payments support and continued private capital inflows, raising official reserves to US$3 billion (about six months of imports) by end year.

Unemployment declined steadily through September before edging up toward the end of the year reflecting seasonal factors and a quicker pace of restructuring. With ongoing privatization, public sector employment continued to shrink, and the private sector’s share in value added rose above 60 percent. Wages in state-owned enterprises recouped much of the ground lost since their end-1995 peak, in both U.S. dollar and real terms, and with declining international prices, profitability in the traditional export sector deteriorated.

The banking system has been strengthened considerably. Remonetization during the second half of 1997 left banks highly liquid, and all banks exceed capital adequacy targets of 10 percent. Credit expanded moderately with a substantial share going to households. There were no apparent strains on the CBA as a result of turmoil in emerging markets. Except for a brief period following the Russian debt default, yields on domestic short-term government securities have remained in the range of 5 to 5½ percent per year.

These favorable developments are the result of prudent fiscal policies, continuing structural reform, and the beneficial effects of Bulgaria’s reorientation toward Western Europe. For 1998, a budget surplus of about 1 percent of GDP was realized. Windfall revenue gains from one-time factors were largely saved, while underlying revenue performance was stronger than anticipated. Tax reforms and measures to strengthen tax administration contributed. Part of the surplus accumulated during the first three quarters of the year was used to grant an additional month’s payment to government employees and a one-off pension payment, and to finance municipal infrastructure investments.

Considerable progress has been made in advancing an ambitious structural reform agenda designed to strengthen the banking system and financial discipline, accelerate privatization, and liberalize the economy. While momentum flagged in some areas, most notably privatization, during the first half of 1998, the pace of reform picked up with the adoption and implementation of the authorities’ medium-term program.

Looking ahead, Bulgaria faces major economic challenges. Achieving the high, sustainable growth Bulgaria needs to raise living standards requires steadfast implementation of structural reform. While the need to accelerate restructuring, together with the deterioration in the external environment, is expected to have adverse effects on the economy in the near term, persistence with restructuring will lay the foundation for strong growth over the medium-term.

Executive Board Assessment

The Executive Directors considered that Bulgaria’s economic performance over the past year had generally been good. The continued economic recovery and lower than expected inflation in 1998 were particularly welcomed. Those favorable outcomes were the result of prudent fiscal policy and satisfactory progress in most areas of structural reform. Looking forward, Directors observed that achievement of the authorities’ goals of establishment of a full-fledged market economy and accession to the European Union would require continued efforts to preserve the benefits of financial stabilization and steadfast implementation of wide-ranging structural reforms.

Directors observed that the policy challenges facing the authorities had been intensified by the weakened external environment following the recent turmoil in emerging markets. Bulgaria’s limited access to international private capital and its increased trade orientation toward Western Europe had sheltered the country somewhat, but weaker foreign demand, reduced investor interest, and increased risk premiums on external debt had increased uncertainty about future prospects. To guard against the downside risks posed by those circumstances, Directors urged the authorities to accelerate and deepen their program of structural reform, especially through the rapid privatization of public enterprises, the creation of a favorable environment for new private firms, and measures to strengthen the financial sector. They also stressed that the authorities should be prepared to adjust fiscal policies to changing circumstances in order to maintain external viability, including a steady reduction in the public and external debt burden, while continuing to support economic growth.

Directors noted that the overall fiscal balance was expected to move to a deficit in 1999, following a small surplus in 1998, owing in part to the transitional costs of structural reforms and higher public investment in infrastructure. They considered it unlikely that, under present conditions, that shift would pose major risks to the external position, but at the same time Directors welcomed the inclusion of safety margins in the budget and the authorities’ commitment to adjust the fiscal stance as needed, particularly as reflected in the contingency plans for flexibility in discretionary spending.

Directors stressed the need for fiscal reforms, in particular to improve the efficiency and equity of the tax system. In this connection, they welcomed the comprehensive initiatives incorporated into the 1999 budget, which included a broadening of the tax base, a strengthening of tax administration, increased fiscal transparency, and improvements in the composition and management of public expenditure. Directors were pleased that the first stages of pension and health care reform were now under way, and attached great importance to the authorities’ proceeding with work in those areas as a matter of priority so as to safeguard medium-term fiscal viability.

Directors noted the critical importance of the currency board arrangement in the success of the present adjustment program. They stressed that sustained discipline in the budget, an effective incomes policy, and structural reform will continue to be essential to support the currency board arrangement and maintain market confidence.

Directors commended the authorities’ progress in most areas of structural reform. However, they were concerned by the slow pace of privatization, which could further delay much-needed foreign investment, and by the still weak enterprise financial discipline and soft budget constraints. Directors considered that those factors could lead to excessive wage increases, which would erode enterprise profitability and competitiveness, and thereby undermine growth prospects, particularly given the fixed exchange rate. Welcoming the authorities’ commitment to accelerate the pace of reform, they particularly emphasized the importance of completing the enterprise isolation program by midyear, improving the quality and process of privatization, and strengthening the effectiveness of incomes policy.

Directors agreed that other efforts to strengthen market-oriented policies and institutions would also need to continue in order to ensure rapid sustained growth based on private sector initiative and investment. They placed considerable emphasis on steps to strengthen the financial sector, including through privatization, which should help increase the efficiency of the banking system. Directors also urged further strengthening of banking supervision and the legal and regulatory framework. They noted that additional market mechanisms would need to be established in the energy and agriculture sectors, including the phasing out of government subsidies and the development of a land market. Directors also noted the desirability of further trade liberalization in the medium term. In addition, they stressed the need for civil service and legal reforms to enforce contracts, improve bankruptcy procedures, reduce red tape, and fight crime and corruption.

While recognizing that Bulgaria’s economic and financial data were adequate for policy formulation and monitoring, Directors encouraged the authorities to improve further the quality and timeliness of statistics.

Bulgaria: Selected Economic Indicators

1995 1996 1997 19981

Real economy (Percentage change)
Real GDP 2.1 -10.9 -6.9 4-5
CPI, 12-month2 32.9 310.8 578.5 1.0
Unemployment rate (percent)2 11.1 12.5 13.7 12.2
Public finance (In percent of GDP)
General government balance3 -6.3 -12.7 -2.5 0.9
Public debt 107.3 116.0 104.1 81.1
Money and credit (Percentage change, end of year)
Real broad money2 5.1 -45.1 -32.3 8.5
Real credit to the non-government sector2 -0.4 -20.6 -56.0 5.0
Interest rates (annualized) (In percent)
BNB basic rate (end-month average)2 39.8 435.0 7.0 5.2
Real short-term lending rate (12-month average)4 33.9 -20.8 -50.5 13.2
Real one-month deposit rate (12-month average)4 7.3 -49.0 -63.9 2.2
Balance of payments (In millions of U.S. dollars)
Gross official reserves2
(In months of GNFS imports)
Current account (percent of GDP) -0.2 0.8 4.1 -1.0
Trade balance (percent of GDP) 0.9 1.9 3.6 -1.9
Exchange rates
Exchange rate regime CBA since July 1, 19975
Present exchange rate (January 5, 1999) 1,658.89 leva/US$
Nominal effective exchange rate (1995=100)6 100.0 56.9 5.6 5.4
Real effective exchange rate (1995=100)67 100.0 86.1 105.1 123.8

Sources: Bulgarian authorities; and IMF staff estimates.

1Projection, unless otherwise stated.
2Actual end-December 1998
3Actual outcome for 1998.
4Average annual monthly rates annualized; actual for 1998.
5The currency board arrangement fixed the exchange rate at 1,000=1 DM through end-1998 and 1,955.83 leva=1 euro from January 1, 1999.
6Annual average level.

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 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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