Sofia, Bulgaria, March 7, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

The Government of Bulgaria has continued to implement sound stabilization and reform policies under its three-year economic program supported under the extended arrangement. Our fiscal policy has been prudent, and we observed all performance criteria for end-December 2000. Reflecting our sustained sound policies, recent macroeconomic developments have been broadly favorable. GDP growth in 2000 was very strong, and the current account deficit and inflation were kept under control.

We believe that our three-year program, which is nearing completion, has improved Bulgaria's economic situation dramatically. We have achieved macroeconomic stabilization, reduced the external debt burden, privatized the bulk of the enterprise and banking sectors, and initiated the restructuring of the infrastructure monopolies. Building on these achievements, we are now well positioned to put Bulgaria on the path of sustained robust growth and improved living standards, while preparing for EU accession.

Encouraged by the strong results, we are determined to stay on course and complete our three-year program successfully. The attached Memorandum on Economic Policies of the Government of Bulgaria describes the progress made and measures that we will implement during the remaining term of the program. On the basis of performance under the arrangement so far and the policies described in the Memorandum, we request the completion of the fifth review under the arrangement.

The Government of Bulgaria believes that the policies described in the Memorandum are adequate to achieve the objectives of its economic program, but also stands ready to take additional measures as necessary to keep the program on track. The government will remain in close consultation with the IMF in accordance with the Fund's policies on such consultations.

Sincerely yours,

Memorandum on Economic Policies of the Government of Bulgaria

A.  Introduction

1.  Over the past year, we have persevered with an ambitious adjustment and reform strategy based on a currency board arrangement (CBA). Fiscal policy has remained prudent, with the general government deficit limited to 269 million leva (1 percent of GDP) in 2000. Incomes policy for state enterprises has been implemented strictly, with the total wage bill of the worst-performing companies continuing to decline. Notable achievements in structural reform during 2000 included the sale of our largest bank (Bulbank), the launching of the new pension and health care systems, the break-up of the electricity monopoly into its generation, transmission, and distribution components, and the removal of a large number of licensing and regulatory requirements.

2.  Our sustained policy efforts have paid off, as we are now experiencing a robust economic recovery. Led by exports, GDP growth in 2000 is estimated to have reached 5 percent, the highest rate since the 1980s. This has helped to create a large number of jobs in the private sector, although unemployment remains high at 18 percent, in part reflecting labor shedding in the public sector. The rapid growth is remarkable as it was achieved despite a summer drought and high international energy prices. These factors, together with a weak euro, raised inflation and the current account deficit above the originally projected levels, but both remain under control. While consumer price inflation reached 11.4 percent during 2000, this did not weaken our competitiveness, as strong productivity growth helped our exports to increase by 20 percent in U.S. dollar terms. The current account deficit of US$696 million (5.8 percent of GDP) in 2000 was fully financed by foreign direct investment and other inflows. Confidence in the lev and the CBA remains strong, with gross official reserves at US$3.5 billion and the fiscal reserve account at US$1.1 billion at end-2000.

3.  Encouraged by the positive results, we remain fully committed to sound economic policies in the framework of our three-year adjustment and reform program (July 1998–June 2001) which the IMF supports under the extended arrangement. As in the past, the memorandum contains a comprehensive statement of our objectives and policy intentions. Hence, it describes our initiatives in a wide range of economic areas, with detailed steps and their timing outlined in the Appendix. The measures covered by Fund conditionality are listed in Table 1 and Annexes I–VIII.

B.  Macroeconomic Objectives and Policy Framework

4.  Our main medium-term objectives remain sustained GDP growth of at least 5 percent annually and a fully competitive market economy. These are key to lowering unemployment and enabling Bulgaria to join the EU.

5.  For 2001, we have updated our objectives in light of recent developments (see tabulation below). With productivity gains from enterprise restructuring and a projected favorable external environment, including continued strong growth in Europe, we expect to be able to maintain GDP growth at 5 percent. The projected lower international energy prices, a stronger euro, and maintained wage discipline should help inflation to decline to 4.5 percent. With good prospects for exports and a reduced oil import bill, we project the current account deficit to decline to 4.5 percent of GDP. Continued strong foreign direct investment flows and financing from multilateral institutions should allow us to maintain the fiscal and foreign exchange reserves at comfortable levels.

6.  To achieve these objectives, we will continue to follow our CBA-based adjustment strategy which has served Bulgaria well. Hence, we will implement prudent fiscal and incomes policies to underpin the CBA and preserve competitiveness, and vigorous structural reforms to promote private sector initiative and investment. Our priorities in the structural area include completing the privatization program in non-infrastructure areas, restructuring the energy monopolies, ensuring the success of ongoing major institutional reforms (including in health care and pensions), creating a better business climate, promoting a sound financial sector, and continuing trade liberalization.

C.  Fiscal Policy

7.  We aim at a broadly neutral fiscal stance in 2001, while preserving flexibility to respond to unforeseen developments. Last year, we maintained the general government deficit at 1 percent of GDP, well within the budgeted level. At the same time, owing to higher-than-projected revenues we were able to effect one-time spending increases above budgeted levels in priority areas, including social assistance and investment, and in wages and pensions. For 2001, parliament approved last December a budget with a general government deficit limit of 1.5 percent of GDP. In implementing this budget, we will follow the previous years' practice of limiting discretionary spending to 90 percent of the budget allocation during the first three quarters of the year. If inflation or the external current account deficit threaten to be higher than now projected, we are prepared to take any measures necessary to preserve macroeconomic stability and a sustainable external position. Specifically, under these circumstances we are prepared to continue the 90 percent rule in the last quarter, unless there is a sizable revenue overperformance. Should revenues exceed budgeted levels, we would save the overperformance, primarily to create room for further tax cuts in 2002, provided the external position is not under threat. In assessing the fiscal position, we will count the proceeds from the sale of the second GSM license, net of associated costs of moving defense communications to different frequencies, toward financing the deficit.

8.  We aim to collect general government revenues equivalent to 37½ percent of GDP, while making significant cuts in direct taxes and social security contributions to promote private sector activity. The tax cuts included reducing the personal income tax burden by 2 percentage points, the corporate profit tax rates by 5 points, and social contribution rates by 3 points. In addition, we allowed for accelerated depreciation of software products, streamlined patent (presumptive) taxation, and reduced the VAT refund period for non-exporters from 6 to 4 months. Finally, we continued to lower customs duties in line with our regional and multilateral commitments. With all these measures, we estimate tax revenue this year to be 1½ percent of GDP lower than last year. We had intended to offset some of the revenue loss by removing the zero rating of VAT on tour packages sold abroad, but parliament decided to postpone the removal by one more year. While we are resolved to remove the zero rating from the beginning of 2002, in the interim we have taken compensating measures. We have transferred certain large taxpayers in the services sector from presumptive to profit taxation, eliminated VAT refunds to those companies where false claims are discovered downstream, speeded up the collection of noncompliant VAT payments, and strengthened the fight against VAT fraud. Besides these measures, we are making every effort to further reduce arrears to the budget and the National Social Security Institute (NSSI). We are committed to reducing these arrears from the end-2000 level of 530 million leva by 30 million leva in the first quarter of this year, and by a further 90 million leva in the remainder of the year.

9.  We will contain general government expenditures to below 39 percent of GDP. Given the increase in interest payments this year, noninterest expenditure will be limited to 34 percent of GDP, 2½ percentage points of GDP lower than last year. To achieve the targeted containment of expenditure, we will revert to our baseline expenditure levels following the one-time spending undertaken late last year that was afforded by the revenue overperformance. In addition, we will reduce subsidies to state enterprises through strengthened restructuring and improve financial discipline in the municipalities, as described below. We will also keep the budgetary sector wage bill on a comparable basis constant relative to GDP. As average staffing this year is expected to be 4½ percent below last year's level, reflecting reductions in 2000, we will be able to raise wages in April by 10 percent while leaving room for a moderate further increase in October. These wage increases, together with our World-Bank-supported efforts to link pay to performance and increase wage dispersion, should go some way toward enabling us to retain and attract high-quality staff. To preserve the real value of pensions while staying within the budget allocation, we will keep the July increase in pensions within 10 percent. We will also maintain the real value of social assistance. Moreover, the budget includes expenditure contingencies of 0.9 percent of GDP, mainly to cover the unanticipated transitional costs of health and pension reform and one-time costs of enterprise restructuring.

10.  In 2001, we aim to strengthen the financial performance of the municipalities and the National Social Security Institute. Last year, municipalities required 1 percent of GDP more central government support than budgeted. To prevent this from recurring, we have taken strong measures. In particular, we have increased penalties for fraud substantially, and improved the system to determine the allocation of central transfers to municipalities. Under this system, the central government transfers funds from municipalities with excess tax revenue to those with shortfalls, thus reducing the propensity to accumulate arrears, while giving municipalities an incentive to cover any residual revenue shortfall through nontax revenue which is under their full discretion. Regarding the NSSI, we are taking measures to ensure that its finances improve relative to last year. In 2000, the NSSI's financial position was weaker than budgeted, because the number of contributing employees fell markedly and because expenditures rose in part reflecting an unexpectedly large increase in early retirement before the start of the new pension system. Nevertheless, revenue collection began to pick up in the second half of the year as information sharing with the tax administration improved, targeted audits increased, and arrears collection strengthened. We will make every effort to continue this positive trend, including through increased cooperation with the tax administration, as described below.

11.  We are continuing efforts to create a unified revenue agency (URA) to strengthen our capacity to collect taxes and social contributions. Guided by a comprehensive concept paper adopted by the Council of Ministers in June 2000, an inter-institutional commission has led this effort since last September. Under the supervision of this commission, the project team has helped to initiate joint audits of social contribution and personal income tax withholdings, draft laws to harmonize the bases for the income tax and social insurance and health contributions, produce a new income tax form, and prepare a concept paper for information technology (IT) in the URA. Looking forward, by mid-2001 the commission will approve a plan to concentrate the administration of central taxes in 28 district offices and to allocate local tax collection to the other offices. It will also prepare a plan to strengthen the large taxpayer offices. Moreover, an expert will be recruited to help refine the IT strategy. Revenue collection is also expected to benefit from amendments to the NSSI's regulation on elements of remuneration that will harmonize the base of social security contributions for the self employed with the personal income tax law. The Council of Ministers will adopt these regulations by end-March. To guide further work, the commission will approve and submit to the Council of Ministers a strategic plan for the next stages of the URA project by mid-2001. We will continue to work with World Bank and IMF experts in this area.

12.  We are at an advanced stage of our program to create a fully-functioning treasury. By now, we have consolidated all government accounts in the Bulgarian National Bank into a Single Treasury Account (STA). We have also moved closer to consolidating the government's accounts in commercial banks into the STA by signing new contracts with 19 commercial banks on the transit accounts. In addition, we have revised the chart of accounts for the general government and have started to set it up in the financial management and information system, which we have continued to modernize. First level budget units began operating under this system early this year, pilot second units will do the same in May, and the project will be completed in June 2001. To manage longer term IT infrastructure, we will issue a competitive tender.

13.  Pension reform is advancing on schedule. The overhauled pay-as-you-go system remains widely accepted by the population. While we expect the new system's parameters to help restore the financial viability of this pillar, we are prepared to review the system periodically and adjust its parameters as necessary to ensure its continued sustainability. We are also preparing for the introduction of the fully funded second pillar at the beginning of 2002. We have already licensed 10 mandatory pension funds under this pillar, and most of the necessary regulations were issued in August 2000. To ensure the viability of the second pillar, we will by end-September prepare a development plan that (i) will include a clear definition of social security contributions to be allocated to this pillar and a scheme for financing the transition costs and (ii) will promote the efficient administration of workers' savings. Regarding voluntary pension insurance (the third pillar), we will continue to develop the regulatory framework and supervisory capacity further.

14.  Health care reform is entering its second stage. The outpatient care reform that we launched in mid-2000 was successful, as we met our health care objectives while keeping the costs within budgeted limits. We are now gearing up to introduce hospital care reform in July. In preparation, we have transformed hospitals from budget units to commercial enterprises. To ensure the financial soundness of this stage of the reform, an interministerial working group prepared a framework plan in November 2000, and will finalize a detailed action plan in March 2001. The plan envisages that the National Health Insurance Fund will initially cover 20 percent of hospital care costs, and that this rate will increase gradually in the medium term. With World Bank assistance, we have also established cost and quality control measures on health services and drugs. Moreover, in March we will issue guidelines for wage formation in the health sector aimed at preventing cost escalation.

15.  We are constantly improving our medium-term fiscal framework. We already make rolling three-year projections that are consistent with our medium-term strategy. We aim at a broadly balanced budget, with actual deficits of up to 2 percent of GDP to cover one-time costs of structural reform. On the revenue side, we aim to reduce those tax and social contribution rates that most distort economic activity, while improving revenue collection to maintain the revenue-to-GDP ratio at around 38-39 percent. On the expenditure side, we aim to keep noninterest spending within 35 percent of GDP. In preparation for the submission of our Pre-Accession Economic Program to the EU in May, we are in the process of defining our medium-term expenditure priorities, including the spending needs of NATO and EU accession. We will ensure that our medium-term fiscal projections and priorities remain consistent with fiscal and external sustainability.

D.  Labor Market Policies

16.  To impose hard budget constraints and enhance productivity, we will maintain a strict incomes policy for state enterprises. The incomes policy ordinance for 2000 was implemented successfully. In particular, the enterprises that we monitor most closely (97 companies with the largest losses and arrears, state monopolies, and enterprises receiving subsidies), reduced their combined wage bill by 8.4 percent between the third quarter of 1999 and the same period in 2000. For 2001, we recognize that wage discipline remains necessary to preserve competitiveness, and will issue an incomes policy ordinance broadly along the lines of that for 2000, maintaining a strong link between wages and financial performance in all state enterprises. We will, however, introduce two adjustments in the policy for the most closely monitored companies. First, since the magnitude of problems in the state enterprise sector has been significantly reduced during our IMF-supported program, we will streamline the list of monitored enterprises to include only those that have a significant macroeconomic impact. This will also enable us to enhance our monitoring of the most problematic companies. The updated list of 60 enterprises will include companies accounting for 90 percent of total losses and arrears in state enterprises with over 100 employees, all state monopolies, and the largest companies that receive state subsidies. Second, we will make a moderate adjustment to the nominal wage bill ceiling (so far a freeze) for the companies on the updated list, as the scope for complying with the freeze through reductions in overmanning has in many cases been exhausted and as the higher-than-projected inflation has made the incomes policy even stricter than intended. Specifically, the wage bills of the companies on the updated list will be allowed to rise in 2001 by up to 5 percent from the third quarter of 2000. The limit on the combined wage bill of these companies is a structural performance criterion for end-March 2001. As before, we will take measures, including fining and firing of management, in enterprises with excessive wage increases. Regarding minimum wages, we will continue with the system of twice-a-year raises in line with the increase in the average public sector wage.

17.  We have taken steps to increase labor market flexibility. Following extensive consultations with social partners, parliament approved amendments to the Labor Code in early March 2001. The amendments are consistent with EU and ILO standards, and they make it easier for firms to adjust their workforce to changes in the economic environment. Important changes include making working hours and compensation more flexible, and allowing termination of contracts for economic reasons. To alleviate the costs of labor market adjustment, we continue to implement several active labor market programs. Since last October, the state budget has financed programs (including microprojects under regional and municipal employment programs) targeted at regions with high unemployment. More than 50,000 unemployed persons have participated in these programs, and the 2001 budget provides funds for their continuation through the winter months.

E.  Financial Sector Policies

18.  Our bank privatization program is nearing completion. A new tender was issued for the sale of Biochim bank in September 2000, and by the January 24, 2001 deadline one bid was received. We aim to sign the sale contract by end-April. We also intend to sell the remaining 34.3 percent state's share in the Central Cooperative Bank to a strategic investor, and in preparation for this the Council of Ministers decided in February to transfer the share held by the State Fund for Agriculture to the Bank Consolidation Company. DSK bank (formerly the State Savings Bank) continues to be state owned, but it has been brought fully under the legal and regulatory framework governing commercial banks. Further restructuring of DSK is taking place to diversify its activities and improve the bank's competitiveness in its core small loans and deposit taking markets. In January, the Council of Ministers decided to transfer 25 percent of the state's shares in DSK to the Bank Consolidation Company. We are considering floating the 25 percent stake on the Sofia Stock Exchange, while exploring the longer-term options for the bank, including the involvement of a strategic investor.

19.  With the proper regulatory framework for banking supervision now in place, our efforts to strengthen supervision focus on the quality of inspections, monitoring systems, and the quarterly reports on the state of the banking system and on compliance and enforcement. A new bank bankruptcy law, which we expect parliament to adopt by March, will provide the Deposit Insurance Fund (DIF) improved legal tools to deal with closed banks. These changes in the legal framework, improved information sharing between the Bulgarian National Bank and the DIF, and additional training and staffing will allow the DIF to carry out more effectively its responsibilities. The banking sector will also benefit from a new payment system that is expected to be operational by end-2001 and that will allow for real time gross settlement.

20.  We intend to improve the functioning of financial markets in two main ways: by reducing the risk inherent in providing credit to the private sector (small and medium-size enterprises in particular), and by stimulating the development of corporate securities and equity markets. To facilitate private sector credit, insolvency procedures have been streamlined following the adoption of an amendment to the Commercial Code last October, and the information content of the central credit registry is being strengthened. Moreover, in discussions with the Association of Commercial Banks we have identified the main remaining obstacles for creditors, and will take measures to remove these obstacles. In particular, by end-February the Council of Ministers will send to parliament amendments to the Civil Procedure Code to strengthen creditors' rights, including through making the collection of collateral easier. We expect parliament to approve these amendments before the end of the current session in May. We will, however, proceed very cautiously with further reductions in the minimum reserve requirement, as the July 2000 reduction from 11 to 8 percent did not significantly stimulate lending to the private sector but rather resulted in increased foreign deposits by banks. To develop the domestic securities markets, we will publicly offer and sell on the stock exchange large packages of shares of companies still to be privatized, as well as residual government shares in already privatized enterprises. We will also review the taxation regime for securities transactions and investment income.

F.  Structural Reform

Enterprise restructuring and privatization

21.  The first phase of our privatization program is almost completed, and the second phase related to infrastructure assets is underway. Through end-2000, we had privatized 77.5 percent of state-owned assets excluding infrastructure, and 51.2 percent of total assets. To facilitate the privatization of infrastructure assets and in response to a need to reassess our strategy after the sales of two very large enterprises proved unsuccessful, amendments to the Privatization Act were passed in November 2000. The amendments increase parliamentary oversight, improve transparency, and further curb the privileges of management-employee teams. A supervisory board composed of 7 members of different political parties will oversee the privatization process, and strategies for important deals will be subject to parliamentary approval. Changes in the management structure of the Privatization Agency, and increased access to information and competition among bidders as required by the new law, will make the process more transparent. Regarding large enterprises, we aim to conclude the remaining deals this year. We have formulated a new privatization strategy for the telecommunications company (BTC), incorporating lessons learned from the previous failed attempt and the successful sale of the second GSM license in December. The new strategy envisages widening the circle of bidders and attracting high-quality investors by allowing participation of financial companies, the sale of minority stakes, full transfer of management control regardless of the stake acquired, and attaching a third GSM license to the sale. We will submit the strategy to parliament by end-March, and will proceed expeditiously once parliamentary approval is received. We will also submit a revised strategy for the privatization of Bulgartabak to parliament by end-March, and will relaunch the privatization procedure for Balkancar. Moreover, we will start preparing the privatization of infrastructure assets, especially in the energy sector. We have also made substantial progress in divesting residual shares. Out of 1,069 minority share packages in non-strategic enterprises privatized by end-1999, more than two thirds have already been sold, one fifth transferred to the Center for Mass Privatization, and 5 offered for sale on the Sofia Stock Exchange. Excluding packages held due to restitution or legal problems, we expect the process to be completed by end-2001. As the government's holdings do not exceed 20 percent in any of the remaining companies and as the state no longer has representatives in their governing bodies, we have essentially achieved our objective of removing state interference from companies where the state held minority shares.

22.  We are making substantial progress in speeding up liquidation and bankruptcy proceedings. Despite difficult market conditions, we have continued to dispose of the assets of Group B enterprises (commercial enterprises under the isolation program) entered into liquidation in 1999. Out of 14 enterprises, we have sold 5 and prepared 6 others for sale, and expect the process to be completed this year. For other enterprises in liquidation or bankruptcy, the above-mentioned amendment to the Commercial Code that simplifies and accelerates exit procedures is being implemented. To familiarize judges and trustees with the changes, the Institute for Magisterial Training is organizing seminars and information sessions with the help of foreign experts. Moreover, an inter-ministerial committee set up in July 2000 is enforcing stricter requirements for the selection, removal, and supervision of liquidators for state enterprises. We have also improved the administration of enterprises under the purview of the Ministry of Economy by setting up a specialized commission in March 2000 to supervise the selection and activities of trustees in bankruptcy. The commission has been active in responding to issues raised by creditors and state bodies with respect to the behavior of receivers.

23.  We will continue the restructuring of the national railway company (BDZ). Despite good efforts to implement its financial recovery program, including additional measures taken since mid-year, the financial situation of BDZ was worse than expected last year, owing mainly to higher oil prices and the impact of the strong U.S. dollar on debt service payments. In 2001, the company is taking strong additional measures to reduce its losses to 104 million leva from 150 million leva last year (both figures exclude a state subsidy of 60 million leva), and to reduce its arrears (amounting to 100 million leva at end-2000) substantially. The measures include raising freight fares by 20 percent from the beginning of the year and passenger fares by 15 percent from the beginning of February, further reductions in overstaffing in line with the financial recovery program, and continued sales of nonoperational assets. Looking forward, we will undertake this year the preparation of the company for its impending breakup into freight, passenger, and infrastructure components, as foreseen in the new Railway Law.

Energy sector reform

24.  We will continue to implement our ambitious reform plan aimed at establishing a more competitive and efficient energy sector. The 1999 Energy and Energy Efficiency Act created a legal basis for our energy strategy. In line with this Act, we remain committed to introducing from the beginning of 2002 energy prices at all levels that will allow full economic cost recovery plus an adequate margin to all producers, the transmission company, and the distribution companies-all this under the authority of the State Energy Regulatory Commission (SERC). In preparation for this, in 2001 we will continue to adjust district heating and electricity prices to consumers based on an analysis of the financial condition of the companies in these sectors. This analysis, taking into account full capital and operating costs, will be ready and made available to World Bank and IMF staff by mid-2001. Based on it, the Council of Ministers will by end-September take the necessary actions, if any, to ensure a smooth transition to the new pricing regime, including an appropriate strengthening of the social protection program. Regarding other aspects of the energy strategy, we have since last summer worked on amendments to the Act to clarify and underpin our sector reform strategy and make it fully effective. While the work has taken longer than anticipated, we are determined to submit to parliament amendments to the Energy Act agreed with the World Bank no later than mid-March, and we expect parliament to make every effort to approve the amendments during the current session. These amendments will enable Bulgaria to establish gradually a market-based competitive energy sector. The basic principles underlying the amendments include having private companies carry the responsibility and risk for investing in new projects; allowing competitive commercial transactions at all market levels; and separating policymaking and ownership functions from regulatory and licensing ones among government bodies. The ownership functions will be defined more precisely in the privatization strategy for the energy sector to be adopted by the Council of Ministers and approved by parliament during 2001.The amendments will also provide the legal basis to proceed with the action plan to commercialize the ailing district heating sector, and they will strengthen SERC's independence.

25.  In the electricity sector, the separation of the National Electric Company (NEK) into generation, transmission, and distribution companies has proceeded according to plan. Helped by a sharp increase in exports and our efforts to reduce technological losses and improve financial discipline, the separate entities are generally profitable, albeit with accounting for depreciation at understated historical costs that are far below the capital costs that will be incurred for replacing our capacity in the future. Accounting profits for 2000 amounted to 100 million leva for the generation companies as a group, 260 million leva for the transmission company, and 32 million leva for the 7 new distribution companies. None of these successor companies have incurred arrears to suppliers, the budget, or the NSSI since the separation in mid-2000. The transmission company reduced its arrears of 157 million leva to the two nuclear funds by 71 million in the second half of the year, but it still has arrears of 86 million leva that were inherited from the old NEK. Looking forward, we will make every effort to improve the efficiency and financial position of the electricity companies so that the increase, if any, in prices to consumers this year is minimized. We are also preparing a strategy for privatizing the distribution companies. This strategy will be submitted to the Council of Ministers and parliament for approval during 2001.

26.  We will make all the necessary efforts to strengthen the implementation of the Action Plan adopted in mid-2000 for the district heating sector. In September 2000 the Council of Ministers decided to withdraw central government subsidies from 3 district heating companies (DHCs) before this heating season, and identified 5 other DHCs from which central government subsidies will be withdrawn effective mid-2001. Moreover, in line with the plan, we have developed investment programs for 8 DHCs until 2004–05, and we have started their implementation using our own funds and external financing. However, because of the long discussions over the amendments to the Energy Act we failed to implement some components of this plan, including applying an obligatory fixed payment for disconnected customers in connected buildings. The combined losses of the DHCs for 2000 amounted to 95 million leva of which 90 million leva was covered by direct and indirect subsidies. The 3 DHCs which did not receive subsidies and the 5 DHCs for which subsidies will be discontinued after the current heating season managed to limit their losses to 36 million leva in 2000 through disconnection of large industrial customers which had defaulted on their payments. These as well as other DHCs achieved partial improvement of their collection rate, which for the DHCs as a whole averaged 76 percent during 2000, compared with 58 percent in 1999. Nevertheless, without further measures, and assuming that fuel prices remain at last year's level, financial losses in 2001 are expected to exceed 130 million leva, only 50 million leva of which will be covered by direct subsidies, while investments to the tune of 40 million leva will be needed to prevent further deterioration in the infrastructure. In view of these worrisome developments and prospects, we are determined to catch up with the original timetable of the action plan to the extent possible, including through strengthened collection efforts, further discussions on financial burden sharing with the municipalities in cities with DHCs, and transfer of ownership to interested municipalities or private investors.

27.  The rehabilitation program for Bulgargaz continues to be implemented. The company, however, concluded 2000 with a 2 million leva loss from its core activities (the total loss taking into account several one-off financial charges was 95 million leva), while remaining current on all its obligations. The company intends to improve its economic and financial performance in 2001, including through intensifying its efforts to raise collection rates from 93 percent in 2000 to 95 percent this year. It will also act promptly to prevent the build-up of arrears by major customers, DHCs in particular. Moreover, a privatization strategy for the gas distribution companies will be submitted to the Council of Ministers and parliament for approval during 2001. We also expect that once the amendments to the Energy Act are in place, large customers will be able to contract gas supplies from suppliers other than Bulgargaz and have access to the gas network at a nondiscriminatory fee under secondary regulations to be developed by SERC.

28.  The restructuring of the coal sector is proceeding in line with the revised action plan adopted in June 2000. This plan aims at closing unviable coal mine sections, and preparing viable mining companies for privatization. In line with the plan, in the second half of 2000 we put 5 nonviable coal mine companies into liquidation. Technical liquidation in these companies has already started and will be completed as soon as technically feasible, except in sections of mines for which private investors have expressed interest by mid-2001. The financing of the liquidation activities will be limited to the budgeted 35 million leva in 2001, and we will not allow budgetary support for technical liquidation to be used for the continuation of coal mining activities. In addition, we have opened the privatization procedure for 11 coal mining companies, and will complete the process following the approval by the Council of Ministers and parliament of a privatization strategy for the coal sector.

Improving the business climate

29.  We continue to give high priority to improving the business environment and attracting foreign direct investment. Drawing on an interministerial review and in consultation with business associations, we have continued to streamline the licensing and regulatory regime. Last year, 121 requirements were revoked or simplified, and we aim to rationalize 40 more restrictions by mid-2001. In addition, a "one-stop shop" program limiting the interface between the administration and business to a single office has been introduced in all the ministries, all the 28 districts, and 14 municipalities, and will be expanded further. Moreover, the documentation of procedures to be followed to open a business is being improved. We have also taken steps to facilitate the day-to-day operation of existing enterprises by streamlining the procedures for tax payments and submitting to parliament a bill providing the proper legal basis for financial transactions and documentation in electronic form. To improve the environment for foreign investment, we are preparing a draft international arbitration law enabling companies with more than 50 percent foreign participation to have access to international arbitration. We recognize that improving the business environment requires a more effective judicial system for corporate affairs and quicker and enhanced enforcement of court judgments in commercial disputes, and intend to provide specialized training in commercial legislation to the judiciary and take a more pro-active stance on enforcement issues. We also recognize that the quality of services provided by public administrations, at the local level in particular, continues to suffer from bureaucratic rigidities and a lack of transparency. To address these problems, we will continue our public administration reform, and seek World Bank and EU support for this effort.

External sector policies

30.  We have continued to liberalize our trade regime to improve competitiveness and attract foreign direct investment. The 2001 Customs Tariff, which entered into force on January 1, reduced the simple unweighted average level of our most-favored nations (MFN) tariffs from 13.7 percent in 2000 to 12.4 percent. The average tariff for industrial goods came down from 11 to 10 percent, and that for agricultural products from 24 to 22 percent. The number of tariff bands has also been reduced, from 25 to 22. In addition, tenders for the privatization of the remaining state-trading companies have now been issued, except for two companies for which legal proceedings have caused a delay. Looking forward, we will further liberalize and simplify our trade regime. We have established an interministerial working group to develop a multiyear schedule aimed at gradually harmonizing our tariff policy with that of the EU, taking into account the implementation of WTO Agreements. A preliminary schedule will be ready by September 2001. The first MFN tariff reductions under this schedule will be included in the 2002 Customs Tariff.

31.  We will continue to give a high priority to prudent management of external debt. In this, we will be guided by a new Sovereign Debt Law which we expect parliament to approve during 2001. In 2000, we set up a computerized system for registering and monitoring domestic and external debt as well as government guarantees, and put in place a committee coordinating operational debt management decisions. Following the recently reached understanding with Austria on outstanding bilateral obligations, we no longer have outstanding bilateral debt disputes. We will continue to seek agreement with individual members of the Paris Club on debt swaps for infrastructure, environment, and social development and will open discussions with HIPC-eligible countries to reconcile outstanding claims. We will undertake debt management operations only if overall liquidity is sufficient and if there are adequate reserves in the fiscal reserve account. IMF staff will be consulted prior to such operations.