During the past week, the IMF mission held constructive discussions with the Bulgarian authorities. We thank the Bulgarian authorities and other counterparts for their cooperation and hospitality.

The mission's main objective was to complete negotiations on a program that can be supported by a precautionary two-year Stand-By Arrangement (SBA). These discussions were initiated in March/April 2004. Following that earlier mission, the Executive Board met on June 14 to discuss the Article IV staff report and the Ex Post Assessment. (EPA) of longer-term program engagement with the IMF. During that discussion, Executive Directors commended Bulgaria for the progress made under the last SBA and endorsed the recommendation of the EPA to proceed with a successor SBA.

The macroeconomic situation remains broadly favorable, but external risks have intensified. Robust GDP growth and moderate inflation are expected to continue in 2004. However, bank credit growth has continued at high rates, and the external current account deficit is expected to widen beyond earlier predictions. These heightened macroeconomic risks require appropriate responses from the authorities.

The authorities have prepared an economic and financial program for 2004-06 that seeks to reduce these risks and aims to strengthen the foundations for sustained high economic growth in the run-up to EU membership. Its main elements are as follows: (i) a tighter fiscal stance in 2004 than envisaged during the Article IV discussions, with at least fiscal balance targeted; (ii) a strong incomes policy to ensure international competitiveness; (iii) measures to drain banking system liquidity and further strengthen bank supervision; and (iv) structural reforms to boost the business climate and continued privatization to improve the functioning of the economy.

The IMF mission views this program as an appropriate response to the risks. The program is outlined in a memorandum of economic and financial policies, which the mission will present to IMF management and the IMF's Board for approval. If such approval is given, we expect the new arrangement to be in place by early August.