Bulgaria and the IMF

Press Release: IMF Completes Third Review and Approves US$37 Million Disbursement Under Stand-By Arrangement for Bulgaria
July 8, 2003

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Bulgaria—Letter of Intent and Supplementary Memorandum of Economic and Financial Policies
Sofia, Bulgaria, June 18, 2003

The following item is a Letter of Intent of the government of Bulgaria, which describes the policies that Bulgaria intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Bulgaria, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

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

Dear Mr. Köhler:

The attached Supplementary Memorandum of Economic Policies (SMEP) discusses our performance under the program supported by the Stand-By Arrangement (SBA) with the Fund and the policies that the government and the Bulgarian National Bank plan to implement during the remainder of 2003 and 2004. We remain committed to our policy objectives laid out in the Memorandum of Economic Policies (MEP) dated February 12, 2002 and updated in the SMEPs dated July 5, 2002 and January 22, 2003. In the context of our currency board arrangement, we will maintain macroeconomic stability, while working toward continued robust and sustainable growth to improve our people's living standards.

During the last six months, macroeconomic performance has been strong and, as indicated in the SMEP, program implementation was on track. As the third review was delayed for a few days into July, end-June performance criteria (PCs) are legally controlling for the purchase associated with this review. In this context, we request a waiver of applicability for all end-June performance criteria for which data are not yet available. We expect to observe all PCs. We propose to convert the indicative targets previously set for end-September and end-December 2003 into performance criteria.

In view of the above we request the completion of the third review under the SBA. In addition to analyzing economic policies and conditions in general, the fourth review will focus on measures to strengthen tax administration, expenditure management, and the budget process. We will continue to consult with the Fund on a regular basis regarding any additional measures that may become appropriate to ensure that program implementation remains on track.

Sincerely yours,

Milen Velchev
Minister of Finance
Ministry of Finance
Svetoslav Gavriiski
Bulgarian National Bank

Supplementary Memorandum of Economic Policies of
the Government of Bulgaria and the Bulgarian National Bank

A. Introduction

1. Bulgaria has made further progress toward sustained robust economic growth and higher living standards, which are key objectives of our economic program. To this end, we have continued to adhere to cautious fiscal and incomes policies in support of the currency board arrangement (CBA). We are carrying out our structural reform agenda to foster growth, while strengthening the social safety net, and taking steps to reduce long-term unemployment.

2. The implementation of our economic program--supported by a Stand-By Arrangement with the Fund--remains on track. All end-December 2002 and end-March 2003 performance criteria (PCs) and indicative targets were observed, with the exception of the indicative target on arrears to the electricity company (NEK), for which remedial measures have been taken (Tables 1a and 1b). On structural benchmarks, only the transfer of the remaining accounts into the Treasury Single Account has not been done owing to technical difficulties, but the government intends to complete this process by end-September 2003 (Table 2a and 2b).

B. Recent Economic Developments

3. After a strong performance in 2002, macroeconomic developments in the first quarter of 2003 have remained favorable, despite an unsettled external environment, including continued slow growth among Bulgaria's trade partners.

  • In 2002, real GDP growth reached 4.8 percent, while unemployment declined significantly. These trends have continued in early 2003, with strong economic activity and a further reduction in unemployment to 14.9 percent at end-April 2003.

  • Inflation has fallen steadily, with an increase in the CPI of only 0.2 percent in the twelve months to April 2003.

  • The twelve-month external current account deficit increased to 5¼ percent of estimated GDP in the first quarter of 2003 (from 4½ percent of GDP in 2002), as strong imports, notably of raw materials, consumer goods, and oil products, more than offset robust exports. In volume terms, twelve-month import growth reached 25 percent, while export surged by 28 percent. Net FDI inflows, computed on a twelve-month basis, covered 60 percent of the current account deficit and the remainder of the deficit was financed in part by a drawdown in international reserves.

  • In 2002, the external financing position strengthened, reflecting the improved current account, the repatriation of banks' deposits abroad, and collateral released in debt management operations. Despite lower-than-expected foreign direct investment, gross international reserves increased to slightly more than 5 months of prospective imports and have remained at that level in the first quarter of 2003. The external debt-to-GDP ratio has decreased sharply to 58.4 percent of projected 2003 GDP by end-March. Reflecting these gains, in late May and early June Standard&Poor's and Moody's upgraded Bulgaria's long-term foreign currency rating by one notch to BB+ and by two notches to Ba2, respectively, while spreads on the Bulgaria component of the EMBI+ index have dropped to an all-time low range of 190 to 230 basis points.

  • Financial intermediation has continued to rise rapidly, albeit from a still-low base, contributing to strong economic activity. Real broad money and credit to the private sector rose by 12½ and 47½ percent, respectively, in the twelve months ending April 2003, while interest rate spreads continued to narrow. Prudential indicators suggest that the banking system has remained sound, although profitability has suffered somewhat.

4. We met our 2002 fiscal deficit target and the execution of the 2003 budget has been significantly better than programmed. Last year, the deficit was limited to 0.6 percent of GDP and, in the first quarter of 2003, a surplus of 0.3 percent of annual GDP was recorded, compared to a projected deficit of 0.8 percent of GDP. Most of the overperformance in the first quarter was accounted for by better-than-projected revenue collection, in particular with regard to non-tax revenues. The registration of labor contracts and introduction of minimum insurable income thresholds has contributed to a significant rise in social security contributions, which were in line with program expectations. Spending was lower than budgeted as we proceeded cautiously with discretionary spending and some savings on external interest payments materialized. However, a sharp increase in the reimbursement of medicines by the National Health Insurance Fund (NHIF), delays in implementing reforms in the hospital sector, and the underfunding of mandated spending in the municipalities have resulted in spending overruns and arrears accumulation in these sectors, which we intend to address during the rest of the year.

5. We have continued to implement reforms that would keep our fiscal policy on a sound footing over the medium term. We have made progress in staffing and building the capacity of the National Revenue Agency (NRA) and strengthened the operations of the Large Taxpayer Office (LTO), meeting ahead of schedule the structural benchmark of raising the share of corporate tax revenue collected by the office to above 60 percent. We also tabled in parliament amendments to the municipal budget act to provide a measure of revenue autonomy to local government and clarify the scope of transfers from the central government.

6. Structural reforms have advanced, including with bank privatization and improvements in energy sector efficiency, but progress in some areas has proved more challenging. We have completed the sale of the last large government-owned commercial bank (DSK). We have continued to reform the railways sector, including by reducing loss-making activities, raising passenger tariffs toward cost-recovery levels, and lowering labor costs; and made significant progress in improving the efficiency of district heating. However, the privatization of the tobacco holding (Bulgartabac) ran into difficulties and would need to be relaunched, while the sale of the telecommunication company (BTC) is taking more time than initially envisaged. Reforms to improve the business climate and restructure the health sector have proved more difficult.

7. We have further strengthened banking supervision in light of the rapid growth in lending and taken measures to address the occasional large fluctuations in inter-bank overnight rates. In January, we introduced the new international accounting standards and more detailed bank reporting requirements, including for the currency composition of banks' balance sheets and income and expenses statements. We have maintained a proactive stance regarding supervision, with unscheduled bank inspections in response to signs of serious breaches of prudential norms, followed by mandatory remedial actions and an implementation timetable. In June, we implemented the real time gross settlements (RTGS) system, which will significantly improve the timeliness and security of bank transactions, while reducing occasional sharp fluctuations in interbank overnight interest rates. In this context, a small facility of 10 million leva financed by banks' contributions has been set up at the Bulgarian National Bank (BNB) for the purpose of smoothing temporary daily shortages in leva liquidity. In order to reduce volatility in overnight interest rates, a limited reverse repo facility (of up to 25 million leva) has been successfully introduced by the Ministry of Finance and the BNB has introduced same-day-value exchange of euros into levas by commercial banks.

C. Economic Policies for the Remainder of 2003 and 2004

8. With global uncertainty subsiding, we see our macroeconomic objectives for 2003 intact and medium-term prospects favorable. Having weathered the global tension at the beginning of the year with minimum fallout, our economy is expected to continue to grow as envisaged in our program, led by further gains in export markets and strong growth in investment. We expect inflation to remain subdued, reaching 4 percent at end-2003. The external current account deficit is projected to remain at about 4½ percent of GDP in 2003 and decline gradually over the medium-term. However, we are mindful that our external position could deteriorate if EU recovery in 2003 is slower than expected or if the rapid credit growth leads to an unexpectedly large import boom. We would adjust our policies to such circumstances.

Fiscal Policy and Public Sector Reforms

9. We believe our fiscal targets for 2003 and the medium term are fully achievable but stand ready to implement additional measures, as needed. The strong first quarter outcome and some additional revenue overperformance and interest savings projected for the remainder of the year provide sufficient cushion to meet the spending pressures that have emerged in the health and municipal sectors. In tandem with measures to stem these pressures, we intend to spend part of this overperformance of approximately 0.8 percent of GDP to cover the reimbursement of medicines and fully fund mandated spending by municipalities. In case the revenue overperformance were to exceed current projections for the remainder of the year, it would in part be saved--at least to the extent the overperformance is due to one-off factors--and the rest spent in the fourth quarter according to budget priorities. However, if the external current account deficit were to widen significantly relative to program expectations, spending would be kept in line with the original budget targets and, if necessary, the 88 percent rule continued through the fourth quarter.

10. We are taking steps to limit budget overruns and arrears accumulation in the health care sector and in municipalities. To deal with the immediate financial pressure arising from overruns in the repayment of medicines, the NHIF is taking administrative steps to increase the co-payment rate and better control the volume of prescriptions. Activities in a number of hospitals under the Ministry of Health are being rationalized. Looking at the longer haul, we are designing, in coordination with the World Bank, a broader hospital reform plan that would put the financial situation of the sector on a sound footing by gradually increasing the role of output indicators and the NHIF in hospital financing. As for municipalities, we intend to complete the broad reform agenda that was initiated last year. In this regard, we expect parliament to approve amendments to the municipal budget law by end-July. Clearance of municipal arrears will be limited to those related to the underfunding of mandated spending and the prompt payment of municipal obligations to public utilities will be strictly enforced.

11. We will continue to implement measures to improve tax administration. To make the NRA fully operational as soon as feasible, we will, by end-September, select an information technology system and initiate a pilot project in Bourgas (structural benchmark) and, by end-year, separate the collection function within the national social security institute (NSSI). We are taking steps to ensure that current efforts to strengthen revenue collection--notably the implementation of VAT accounts, the LTO, and the registration of labor contracts and minimum insurable income thresholds for social security contributions--are generating the results expected. To combat customs fraud, new counterfeit-proof banderoles for cigarettes and alcohol will be introduced, border point duty free shops will be closed except at airports, and the recommendations from the Crown Agents consultants implemented.

12. We are taking steps to enhance budgeting and expenditure management in the context of the preparation of the 2004 budget. We intend to bring the preparation process back in line with the new, accelerated schedule, and decide on the 2004 expenditure ceilings before the summer recess. Pilot program budgets for 2004 are under preparation in three ministries. The creation of a full-fledged Treasury Department and implementation by end-2003 of the Financial Management Information System at all second level spending units of the Ministry of Finance will strengthen budget execution significantly.

13. In line with our medium-term fiscal strategy, our goal remains to move to a balanced budget by 2005. In this context, we will continue to implement the tax policy plan adopted last year with a view to reducing the overall tax burden, shifting from direct to indirect taxation, and maintaining a broad tax base. More specifically, we aim to reduce the corporate tax rate to 20 percent in 2004 and 15 percent in 2005. Assuming continued good collection performance by the NSSI, we will consider reducing the social security tax rate. On the expenditure side, we intend to raise social spending and to expand the public investment budget in 2004--to absorb an increase in EU-financed projects while limiting crowding out of other projects. In order to create room for tax cuts and additional social and EU accession-related spending, we will step up our efforts to improve tax administration, curtail government subsidies--including for railways, district heating and hospitals--and improve the efficiency of government spending overall.

Labor Market and Other Structural Reforms

14. To maintain competitiveness and further lower unemployment, we will continue efforts to reform the labor code and strengthen active labor market policies (ALMPs). We will foster dialogue among social partners on the proposed labor code amendments to reduce hiring and firing costs. We will continue to help long-term unemployed regain their footing in the labor market through our program "From Social Assistance to Employment" and ensure that labor contracts are formally registered. We are committed to monitor and evaluate closely the efficiency and effectiveness of ALMPs and adjust these as appropriate.

15. We will advance privatization and expedite reforms in the energy and railways sectors. We will seek to complete the privatization of Bulgartabac and BTC in a fully transparent manner as quickly as possible. In addition, we will carry on with the preparations for the sale of electricity distribution companies. To facilitate this process and provide a modern institutional and legal framework to the energy sector in Bulgaria, we intend to have the draft energy law passed in parliament by end-June. Technical and administrative changes that are improving the efficiency of the district heating system are continuing and we expect to virtually eliminate the need for government subsidies next year. As for the railways, we will aim to create separate units for freight and passenger transport by end-July 2003 and reach our objectives of 10 percent reduction in personnel compared to 2001 and raising intercity passenger tariffs to 70 percent of cost-recovery levels by end-2003. Further, we are in the process of costing individual services, which will serve as a basis for signing public sector obligation contracts with the government in the context of the 2005 budget.

16. We will push for further legal and institutional reforms to enhance the business climate. With the assistance of the EU, World Bank, and others, we will step up the reform of the judiciary and take further steps to improve governance. To help attract more investment, we will continue to reform licensing, permit, and registration regimes and reduce their number. In this context, the draft licensing law, expected to be adopted by parliament by end-July, is intended to limit the government's discretion in introducing new license and permit requirements. The draft amendments to the commercial code expected to be passed by end-July will simplify bankruptcy procedures.

Financial and External Sectors' Policies

17. In the face of still-strong private sector credit growth, we will continue to strengthen the supervision of the banking system. We will continue our policy of conducting unscheduled inspections of any troubled bank followed by mandatory remedial actions. To minimize risks associated with rapidly increasing foreign currency lending, we will monitor closely the foreign currency exposure of banks and urge them to properly hedge against such risks. At the same time, with IMF technical assistance, we will determine the appropriate approach to monitoring the foreign currency-related credit risk arising from banks' fast growing lending in foreign currency to the corporate sector. In this context, the expected passage of amendments to the foreign currency law that would require companies to provide information on their foreign assets to the BNB would--along with the already compiled data on companies' foreign liabilities--help assess their foreign currency exposure.

18. The proposed government-sponsored private equity fund will be established with a government contribution not exceeding 100 million leva throughout the fund's life and with appropriate safeguards. We continue to view the establishment of this fund as important to increase equity financing in the private sector, and are moving to select among the short-listed bidders fund managers. We will, at launch, limit government participation to no more than 49 percent of committed funds, with the intention to reduce this participation over time. We will closely monitor the fund's performance. Further, we will establish other firewalls to help ensure that investment decisions are made without government involvement, including the requirement for the government to be a minority shareholder.

19. We will carry on with our active public debt management, with a view to continuing to reduce external vulnerability. Our objectives in this regard remain to achieve a more balanced interest and currency composition of the debt and increase the share of domestic debt, while continuing to lower the public debt-to-GDP ratio over the medium term. In addition, as opportunities present themselves, we will conduct specific debt operations, consistent with our strategy. We are also undertaking a more active management of the deposits in the fiscal reserve account (FRA). In this connection, the BNB has signed an agreement with the World Bank on behalf of the government to manage euro 75 million, according to pre-agreed investment guidelines.

Data Quality Issues

20. We plan to subscribe to the special data dissemination standards (SDDS) by year end, as we are making progress in observing standards and codes, while implementing the remaining safeguard recommendations. The assessment of the review of standards and codes (ROCS) mission in January concluded that we complied with the majority of standards and codes and we are taking steps to move to standards in those areas that were identified to require additional work. In this regard, we plan to disseminate the international reserves and foreign currency liquidity templates by end-2003. We are also making progress in implementing the remaining safeguard assessment recommendations, in particular preparing the audit procedure manual of the BNB.

Table 1a. Bulgaria: Quantitative Performance Criteria and Indicative Targets
Under the Stand-By Arrangement, 20021

(In millions of leva, unless otherwise indicated)
Variable and Periods Target Outcome

I.  Ceiling on the overall deficit of the general government          
  Jan. 1, 2002-Mar. 31, 2002     138     39
  Jan. 1, 2002-Jun. 30, 2002     -103    -271
  Jan. 1, 2002-Sep. 30, 2002     173   -492
  Jan. 1, 2002-Dec. 31, 2002     260    209
II.  Floor on the balance of the fiscal reserve account          
  Mar. 31, 2002     1,900   2,477
  Jun. 30, 2002     1,900   3,275
  Sep. 30, 2002     1,900   3,542
  Dec. 31, 2002     1,900   3,336
III.  Ceiling on the wage bill of the 60 monitored SOEs2          
  Jan. 1, 2002-Mar. 31, 2002     141.8   139.1
  Apr. 1, 2002-Jun. 30, 2002     141.6   140.1
  Jul. 1, 2002-Sep. 30, 2002     141.1   140.0
  Oct. 1, 2002-Dec. 31, 2002     140.6   139.1
IV.  Indicative ceiling on tax on social insurance arrears
Cumulative change from level on Dec. 31, 2001:
  Mar. 31, 2002     -25   -5 -117 -7
  Jun. 30, 2002     -50 -10 -201 -5
  Sep. 30, 2002     -75 -15 -256 -5
  Dec. 31, 2002   -100 -20 -252 -5
Up to
one year
Over 1 year
Up to
one year
Over 1 year (excluding Eurobonds)
V.  Ceiling on contracting and guaranteeing public sector external debt (millions of U.S. dollars)
Cumulative change from level on Dec. 31, 2001:
  Mar. 31, 2002   0 230 0   46
  Jun. 30, 2002   0 560 0 238
  Sep. 30, 2002   0 690 0 238
  Dec. 31, 2002   0 690 0 238
      Over one year (Eurobond issuance) 1-5 years Over one year (Eurobond issuance) 1-5 years
V.  Ceiling on contracting and guaranteeing public sector external debt (millions of U.S. dollars)
Cumulative change from level on Dec. 31, 2001:
  Mar. 31, 2002   300 0     0 0
  Jun. 30, 2002   300 0   -79 0
  Sep. 30, 2002   300 0   -79 0
  Dec. 31, 2002       0 0 -209 0
      NEK Bulgargaz NEK Bulgargaz
VI.  Ceiling on changes to arrears owed to Bulgargaz and NEK (millions of Leva).
Cumulative change in the stock of arrears from level on May 31, 2002:
  Jun. 30, 2002   0 0 0 0
  Sep. 30, 2002   0 0 0 0
  Dec. 31, 2002   0 0 0 0

1Definitions of the performance criteria and indicative targets are included in the Annexes to the Supplementary Memorandum of Economic Policies (EBS/02/121).
2Adjusted downwards after the privatization of one of the monitored enterprises.
3Adjusted downwards after the privatization of three of the monitored enterprises.
4Adjusted downwards after the privatization of one of the monitored enterprises.
5Adjusted downwards after the privatization of one of the monitored enterprises.

Table 1b. Bulgaria: Quantitative Performance Criteria and Indicative Targets
Under the Stand-By Arrangement, 20031

(In millions of leva, unless otherwise indicated)
Variable and Periods Target Outcome

I.  Ceiling on the overall deficit of the general government          
  Jan. 1, 2003-Mar. 31, 2003     304.9   -109.5
  Jan. 1, 2003-Jun. 30, 2003     100.5    
  Jan. 1, 2003-Sep. 30, 2003       75.7    
  Jan. 1, 2003-Dec. 31, 2003     262.8    
II.  Floor on the balance of the fiscal reserve account          
  Mar. 31, 2003     2,400   3,442
  Jun. 30, 2003     2,400    
  Sep. 30, 2003     2,400    
  Dec. 31, 2003     2,400    
III.  Ceiling on withdrawals from the fiscal reserve account for the acquisition of policy related financial assets
Cumulative change from level on Dec. 31, 2002:
  Mar. 31, 2003       85   34.5
  Jun. 30, 2003     130    
  Sep. 30, 2003     180    
  Dec. 31, 2003     150    
IV.  Ceiling on the wage bill of the 60 monitored SOEs          
  Jan. 1, 2003-Mar. 31, 2003     150.1   145.2
  Apr. 1, 2003-Jun. 30, 2003     150.1    
  Jul. 1, 2003-Sep. 30, 2003     150.1    
  Oct. 1, 2003-Dec. 31, 2003     150.1    
V.  Ceiling on tax on social insurance arrears
Cumulative change from level on Dec. 31, 2002:
  Mar. 31, 2003   -10   -3 -12.2 -3.6
  Jun. 30, 2003   -20   -6    
  Sep. 30, 2003   -30   -9    
  Dec. 31, 2003   -70 -12    
      Up to
one year
Over 1 year
Up to
one year
Over 1 year (excluding Eurobonds)
VI.  Ceiling on contracting and guaranteeing public sector external debt (millions of U.S. dollars)
Cumulative change from level on Dec. 31, 2002:
  Mar. 31, 2003   0 400 0 318.5
  Jun. 30, 2003   0 450    
  Sep. 30, 2003   0 450    
  Dec. 31, 2003   0 500    
      Over one
year (Eurobond issuance)

1-5 years Over one year (Eurobond issuance) 1-5 years
VII.  Ceiling on contracting and guaranteeing public sector external debt (millions of U.S. dollars)
Cumulative change from level on Dec. 31, 2002:
  Mar. 31, 2003       0 0 0 0
  Jun. 30, 2003   250 0    
  Sep. 30, 2003   250 0    
  Dec. 31, 2003   150 0    
      NEK Bulgargaz NEK Bulgargaz
VIII.  Indicative ceiling on changes to arrears owed to Bulgargaz and NEK (millions of Leva).
Maximum accumulation of new arrears from level on October 31, 2002:
  Mar. 31, 2003   0 0 2.5 0
  Jun. 30, 2003   0 0    
  Sep. 30, 2003   0 0    
  Dec. 31, 2003   0 0    

1Definitions of the performance criteria and indicative targets are included in the Annexes to the Supplementary Memorandum of Economic Policies.

Table 2a. Bulgaria: Prior Actions, Structural Performance Criteria,
and Benchmarks, 20021

  Measures   Program Timing Form of Conditionality Status Review

MEP, February 2002
1.  Parliament to adopt a 2002 State budget consistent with paragraphs 8-12.   Before IMF Board meeting Prior action Met First
2.  Council of Ministers (CoM) to adopt an ordinance on income policies consistent with paragraph 16.   Before IMF Board meeting Prior action Met First
3.  Finalize the school redeployment plan, and submit it to CoM (paragraph 13).   End-March 2002 Benchmark Met First
4.  Adopt a child allowance allocation system, limiting allowances to most needy families (paragraph 11).   End-March 2002 Benchmark Met First
5.  Bank Consolidation Company (BCC) to adopt a privatization strategy for DSK Bank (paragraph 19).   End-March 2002 Benchmark Met First
6.  Issue a tender either to privatize the State Insurance Institute, or to transfer the management of the company to a strategic investor as an interim step toward privatization (paragraph 19).   End-March 2002 Benchmark Met First
7.  Parliament to adopt the Bank Bankruptcy law (paragraph 21).   End-March 2002 Benchmark Met, with a delay First
8.  Announce a schedule to bring household electricity prices to full cost-recovery levels (paragraph 25).   End-April 2002 Performance Criterion Met, with a delay First
9.  Submit to parliament a law to establish the unified revenue agency (paragraph 14).   End-June 2002 Benchmark Met Second
10.  Complete accreditation process for all hospitals (paragraph 13).   End-June 2002 Benchmark Met, with a delay Second
11.  Have the Council of Ministers approve the final draft of a new Energy Act as described in paragraph 25.   End-June 2002 Benchmark Met, with a delay Second
12.  Make the new energy pricing regime fully operational (paragraph 25).   End-June 2002 Benchmark Met Second
13.  Announce a reform of the import tariff schedule, to be phased over the period to January 2006, reducing the unweighted average MFN tariff to no more than 6 percent with significant annual reductions (paragraph 27).   End-June 2002 Benchmark Not met Second
14.  Further improve the Treasury Single Account (TSA) by ensuring that the funds of the autonomous budgets (BTV, BN Radio, judiciary system, and the HIF) as well as the suspense accounts in Leva are also included in the TSA (paragraph 14).   December 2002 Benchmark Not met Second
Supplementary MEP, July 20022
15.  Announce a schedule to bring household electricity prices to full cost-recovery levels (paragraph 3).   IMF Board presentation of the review Prior Action Met First
16.  Parliament to adopt the Bank Bankruptcy law (paragraph 19).   End-July 2002 Benchmark Met, with a delay Second
17.  Settlement of the sale of Biochim Bank (paragraph 20)   End-September 2002 Benchmark Met Second

1Paragraph numbers refer to the Memorandum of Economic Policies dated February 12, 2002.
2Paragraph numbers refer to the Supplementary Memorandum of Economic Policies dated July 5, 2002.

Table 2b. Bulgaria: Structural Performance Criteria and Benchmarks, 2003
 Measures   Program Timing Level of Conditions Status Review

 SMEP, February 20031
1.  Initiate the publication on the Ministry of Finance website of data on monthly consolidated government budget implementation and on the Fiscal Reserve Account (paragraph 16).   End-March 2003 Benchmark Met Third
2.  Extend the operations of the large taxpayer office so as to include the group of companies that contribute at least 60 percent of tax revenue (paragraph 14).   End-June 2003 Benchmark Met Fourth
3.  Implement the Bullstat number as the single key identification for all tax operations (paragraph 16).   End-June 2003 Benchmark   Fourth
4.  Include all non-participating leva-denominated extrabudgetary funds and autonomous budget units in the Treasury Single Account (paragraph 16).   End-September 2003 Benchmark   Fourth
5.  Make the Financial Management Information System fully operational in the Ministry of Finance (paragraph 16).   End-December 2003 Benchmark    
6.  No new extrabudgetary funds or state-owned enterprises will be created during the program period (paragraph 16).   Continuous Benchmark    
 Financial sector          
7.  Completion of the sale of DSK Bank (paragraph 23).   End-June 2003 Benchmark Met Fourth
 Energy sector          
8.  State Energy Regulatory Commission to announce increase in average household electricity prices by 15 percent (paragraph 20).   June 30, 2003 Benchmark   Fourth
9.  Announce increase in average district heating prices by 10 percent (paragraph 20).   June 30, 2003 Benchmark   Fourth
 SMEP, June 20032
10.  Select an information technology system and initiate a pilot in the town of Bourgas for the National Revenue Agency (paragraph 11).   End-September Benchmark   Fourth

1Paragraph numbers refer to the Memorandum of Economic Policies dated February 12, 2002.
2Paragraph numbers refer to this Supplementary Memorandum of Economic Policies


Performance Criterion on the Overall Deficit of the General Government

Overall deficit ceilings


(In millions of leva)

January 1, 2003-March 31, 2003


January 1, 2003-June 30, 2003


January 1, 2003_September 30, 2003


January 1, 2003_December 31, 2003


The general government accounts are defined to comprise the consolidated budget (including the republican budget, the budgets of ministries and local governments, and the social security fund) as well as all extrabudgetary funds and accounts both at the central and local government levels.

The quarterly limits will be cumulative and will be monitored from the financing side as the sum of net credit from the banking system to the general government, including deposits and accounts abroad, net nonbank credit to the general government, privatization receipts of the budget, and receipts from external loans for direct budgetary support minus amortization paid. For calculating the performance against this ceiling, privatization receipts include the dividends the Bank Consolidation Company (BCC) distributed to the general government and taxes collected from BCC related to the sale of assets, and all the proceeds from the sale of GSM licenses. External drawings and repayments will be converted into leva at the BNB daily exchange rate. Valuation changes in deposits and accounts that are denominated in foreign currencies will be recorded daily and reported by the BNB and the Ministry of Finance at the end of each quarter, and such changes will be netted out.


Performance Criterion on the Floor on the Balance of the Fiscal Reserve Account (FRA)

  (In millions of leva)
March 31, 2003 2,400
June 30, 2003 2,400
September 30, 2003 2,400
December 31, 2003 2,400

The Fiscal Reserve Account (FRA) consists of (1) the balances in leva and in foreign exchange of the following accounts: all budgetary and deposit accounts in the banking system, including the central budget, ministries and agencies, central government extrabudgetary funds as defined in Annex No. 7 of the 2003 Budget Law, the National Social Security Institute, and the Health Insurance Fund, and (2) other highly liquid foreign assets of the central government.

The following assets qualify as highly liquid foreign assets:

(i) Foreign currency deposits with foreign financial institutions (or their branches) assigned a rating of AA- or higher;

(ii) Fixed income instruments issued by supranationals and foreign sovereigns (including financial institutions) that have a rating of AA- or higher, taken at market value;

(iii) Bulgarian Brady bonds and Eurobonds (acquired as treasury stock through market transactions) taken at 95 percent of market value.

In addition, the fixed income instruments (other than the Bulgarian Brady and Eurobonds) liquidity-wise have to satisfy the following conditions:

  • The original size of any issue should be higher than euro 1 billion;
  • Holdings in the FRA should not exceed 10 percent of any issue;
  • The issue should be traded actively (on a daily basis) OTC in London, New York, or Frankfurt;
  • There should be at least 3 market-makers for the issue.

Finally, the modified duration of the entire portfolio of highly liquid assets should not be more than 4.5 years.

The limits will be monitored from the accounts of the banking system and marked-to-market data of other highly liquid foreign assets of the central government, to be provided monthly by the BNB and the Ministry of Finance. For the purposes of the program, deposit accounts and assets that are denominated in foreign currencies will be converted into leva at the December 31, 2002 exchange rates (1.88496 leva, and 0.73555 SDR per US dollar).

The Ministry of Finance will publish information on the level and composition of the FRA on the Ministry's website on a monthly basis. The information will include the overall balance of the FRA, the balance of the government deposit at the Bulgarian National Bank, and the total amount of foreign exchange denominated assets, including the highly liquid foreign assets.


Performance Criterion on the Ceiling on Withdrawals from the Fiscal Reserve Account for the Acquisition of Policy-Related Financial Assets1

Cumulative change from December 31, 2002 2 (In millions of leva)
March 31, 2003   85
June 30, 2003 130
September 30, 2003 180
December 31, 2003 150

1Policy-related assets are financial assets, including loans, equity securities, and debt securities, that are acquired for the purpose of public policy as set forth in paragraphs 7.88 to 7.90 of the Government Finance Statistics Manual, 2001.
2Net of the cumulative value of disposed policy-related assets up to the test date, including through privatization transactions.


Performance Criterion on the Wage Bill of 60 State-Owned Enterprises (SOEs)

Wage Bill of 60 SOEs

  (In millions of leva)

July 1, 2002–September 30, 2002 (actual) 147.2
January 1, 2003–March 31, 2003 150.1
April 1, 2003–June 30, 2003 150.1
July 1, 2003–September 30, 2003 150.1
October 1, 2003–December 31, 2003 150.1

The ceiling on the aggregate wage bill of the 60 state-owned enterprises closely monitored for their large losses or arrears, for receiving subsidies, or for being monopolies, is two percent above the level of their aggregate wage bill in the third quarter of 2002. The wage bill is defined to include wages and payroll taxes paid by the employer.

Those enterprises that have been privatized or ceased operations will be excluded from the list for the respective test dates. Those enterprises that register profits in each of the first two quarters of 2003 will also exit the list in the second half of 2003 unless they are monopolies, have arrears, or receive state subsidies. If an enterprise is excluded from the list, the wage bill ceiling will be adjusted down by the amount of that enterprise's wage bill in the third quarter of 2002 plus 2 percent. The 60 enterprises monitored (enterprises number 1 to 17 are considered monopolies):

1.  Railway Infrastructure Company 21.  Passenger Transport EOOD 41.  Vazov Machinery Works
2.  BDZ EAD 22.  Electricity Transport-Sofia EAD 42.  Bulgartabac—Plovdiv AD
3.  Bulgargas EAD 23.  Autotransport-Sofia EAD 43.  Bulgartabac—Asenovgrad
4.  BTC EAD 24.  Burgasbus EOOD 44.  Motori Technika Agrocultu
5.  National Electric Company 25.  Bus Transport EOOD 45.  Dunarit AD
6.  TPP Varna EAD 26.  DHC—Burgas EAD 46.  Bulgarian Rivershipping EAD
7.  EDC—Varna EAD 27.  DHC Vratsa EAD 47.  Balkancar Holding
8.  EDC—G. Oriahovitsa EAD 28.  DHC—Gabrovo EAD 48.  Bulgartabac Haskovo AD
9.  NPP Kozlodui EAD 29.  DHC—Pernik EAD 49.  Bulgartabac Shumen AD
10.  TPP Bobov D 30.  DHC—Pleven EAD 50.  Bulgartabac Dupnitsa AD
11.  EDC—Pleven EAD 31.  DHC—Plovdiv EAD 51.  Sluntse EAD—Smolian
12.  EDC—Plovdiv EAD 32.  DHC—Ruse EAD 52.  Incoms Telecom Holding A
13.  EDC—Sofia City EAD 33.  DHC—Sliven EAD 53.  Brikel EAD
14.  EDC—Sofia District EAD 34.  DHC—Sofia EAD 54.  Radio Telecommunication OOD
15.  EDC—Stara Zagora 35.  DHC—Kazanluk EAD 55.  EOOD Hemus EAR
16.  TPP Maritza Iztok 2 EAD 36.  DHC—Shumen EAD 56.  Information Services AD
17.  TPP Maritza 3—Dimitrovgrad EAD 37.  Pirin Mines EAD 57.  Mina Zdravec EAD
18.  City Transport—Varna EOOD 38.  Port Burgas EAD 58.  AD Balkankar—Dunav
19.  City Transport Plovdiv EOOD 39.  Eliseina EAD 59.  Terem EAD
20.  Ruse Municipal Autotransport EOOD 40.  Bobov Dol Mines 60.  V & K EOOD—Dobrich


Performance Criteria on Ceiling on Tax and Social Insurance Arrears
  Total GTD NSSI

  (In millions of leva)   

Outstanding as of:


   December 31, 2002 (actual)

430.7 226.6 204.2

Cumulative change from level on December 31, 2002:


   March 31, 2003

-13 -10 -3

   June 30, 2003

-26 -20 -6

   September 30, 2003

-39 -30 -9

   December 31, 2003

-82 -70 -12

These performance criteria are on the sum of changes in monitored arrears to the GTD and arrears to the NSSI. For the purpose of these performance criteria, arrears are defined to include interest and penalties. The enterprises monitored for arrears to the GTD:

1.  Neftochim 11.  Arsenal EAD 21.  Trema AD
2.  Energokabel AD 12.  Vini EAD 22.  Madara AD
3.  Plama AD 13.  Bourgas Seaport 23.  Dunarit AD
4.  VMZ AD - Sopot 14.  PDNG EAD 24.  Maritza KK AD
5.  Haskovo BT AD 15.  Bourgas Sugar Facory AD 25.  Ledenika AD
6.  NEK EAD 16.  Dupnitsa BT 26.  Dobrich Mel AD
7.  Slantze BT AD 17.  Mariza - Iztok Mines 27.  Plovdiv BT AD
8.  Arcus AD 18.  Great Bulgarian Mills EAD 28.  Minstroi Rodopi AD
9.  Sugar Factory AD 19.  Kambana 1899 AD 29.  Pleven BT AD
10.  Pernik Mines 20.  Bulgargaz EAD 30.  Kvarz EAD
31.  Bobovo Coal Mines 38.  NITI EAD Kazanlyk 45.  Varnensko Pivo
32.  Nefteks Petroleum 39.  Stara reka 46.  Kitka
33.  Zachar Bio AD 40.  Shumensko pivo 47.  Svetlina
34.  Stomaneni trabi 41.  Agroteknika 48.  Burgasbas
35.  Orfei 42.  Vineks Preslav 49.  Blagoustroisveni Stroeji Burgas
36.  Chernomorsko Zlato 43.  Cherno more 50.  LVK Gamza
37.  Korabno mashinostroene 44.  Liteks Dzus    

The enterprises monitored for arrears to the NSSI:

1.  Kremikovci AD, Sofia
2.  Stomana AD, Pernik
3.  Port of Burgas, Burgas
4.  Varna Shipyard
5.  Quartz AD
6.  Gorubso Madan AD
7.  Gorubso Zlatograd AD
8.  Gorubso Rudozem EAD
9.  Gorubso-ROF Rudozem AD
10.  Promet EOOD, Burgas
11.  New Plama AD
12.  Stara Reka AD
13.  Tezhko Mashinostroene AD
14.  Kitka AD
15.  Beltrans EOOD
16.  CR Baza-Pernik EOOD
17.  Burgas Copper Mines
18.  Cherno More EOOD
19.  Arkus AD
20.  Prima AD
21.  KK Maritsa
22.  Dynamo AD,
23.  Podem AD
24.  Elprom ETM AD
25.  Rubin AD
26.  Etavia AD
27.  Stomaneni Trabi AD
28.  Obshtinski Avtotransport EOOD
29.  ZMM
30.  Trema
31.  Belopal
32.  Ustrem-Topolovgrad
33.  Marz AD
35.  Montana AD
36.  Sanya
37.  Agropromstroy EAD
38.  Dobritch Mel AD
39.  Radomir Le Co Co EOOD
40.  Filtex AD
41.  Pirin Mines
42.  Nistra EAD
43.  Dobruzhan Meat Company
44.  Dunarit AD
45.  Agrotehnika AD
46.  Dobrich Mel
47.  Harmonia
48.  Ilindentsi Mramor
49.  Orfey OOD
50.  Ptikom EAD
51.  S-M 33
52.  Mediket AD
53.  Sukmo EOOD
54.  Elena Georgieva AD
55.  Mak AD
56.  Rodopa-95
57.  Uvion OOD
58.  ZMM Technotronika
59.  Struma OOD
60.  Pektin EOOD
61.  Incoms EIM
62.  Elko EOOD
63.  V i K
64.  Balgarska Roza-Sevtopolis
65.  Alukom
66.  Niva AD
67.  Kartal EAD
68.  Balkankar-Zaria AD
69.  ZSK Kremikovci
70.  Simpto AD
71.  Semena Dobrich AD
72.  Ruen-Elit AD
73.  I. H. I KO Ahrida AD
74.  Rilski Len AD
75.  Filtex AD
76.  Mak Tours AD
77.  Biliana Triko AD
78.  Zavodski Stroezhi AD
79.  Boni Commerce AD
80.  Pons Holding AD
81.  Kosko EOOD
82.  Varnensko Pivo
83.  DP Construction & Transpt. Acitv.
84.  Sadrujie Stoichevi 57-65
85.  Sokola AD
86.  Zavodski Stroezhi PC-Pernik AD
87.  Asenovgrad BT
88.  Kocho Chestimenski AD
89.  Pulpodeva AD
90.  Vagonno-remonten Zavod-Karlovo
91.  Dunarit EAD
92.  LVZ AD
93.  Vini EAD
94.  Minstroi Rodopi AD
95.  Rozhen Express EOOD
96.  DP Construction and Reconstruction
97.  Industrial Corporation Zelin
98.  UI St. Kliment Ohridski
99.  Mostsroi AD
100.  Alkomet AD

For the purpose of assessing compliance with these performance criteria:

  • the measured changes in arrears will exclude the amount of principal and interest added by any new tax and social contribution assessment acts issued for arrears incurred before December 31, 2002;

  • VAT refund positions (negative outstanding liabilities) will not be netted against liabilities of other enterprises, i.e., if an enterprise has a net refund position, it will count as zero in the total tax arrears for the monitored enterprises;

  • agreements entered into after December 31, 2002 on writing off or rescheduling outstanding liabilities to tax authorities or the NSSI will not reduce amounts counted as outstanding liabilities;

  • enterprises in the list which are entered into liquidation or bankruptcy proceedings will not drop out of the monitored total until they are struck from the register of active enterprises in Bulgaria; however, the total will no longer include new interest and penalty charges accruing after their entry into bankruptcy or liquidation.

  • NEK will include all generation, transmission and distribution companies that were a part of the electricity monopoly prior to its unbundling.


Other Performance Criteria1

1. The BNB will ensure that gross foreign reserves of the issue department are at least equal to the issue department's liabilities at all times. Issue department liabilities will comprise leva notes and coins in circulation, and deposits from the banking department, banks, government, and the nonfinancial sector with the BNB, excluding liabilities to the IMF. For the purpose of this performance criterion, issue department liabilities will be converted into foreign exchange using the official exchange rate. The BNB will exclude placements from other agencies under fund management contracts from the balance sheet of the issue department.

2. The BNB shall not increase credit to the government at any time during the period of the CBA, except as allowed under the Law of the BNB, nor shall it purchase Bulgarian government securities.

3. During the period of the arrangement, the government does not intend to impose new or intensify existing exchange restrictions on payments and transfers for current international transactions, or introduce or modify multiple currency practices, nor conclude any bilateral payments arrangements that are inconsistent with Article VIII of the IMF Articles, nor impose or intensify any import restrictions for balance of payments purposes, nor accumulate any external payments arrears except for amounts subject to rescheduling agreements.

1All performance criteria listed in this annex are applicable on a continuous basis.


Performance Criteria on the Ceilings on Contracting and Guaranteeing
Public Sector External Debt1,2
(In millions of U.S. dollars)
  One year
and Under3
Over 1 year4
1-5 years4
  Excluding Eurobonds Eurobond

Cumulative change from level on December 31, 2002        
   March 31, 2003 0 400     0 0
   June 30, 2003 0 450 250 0
   September 30, 2003 0 450 250 0
   December 31, 2003 0 500 150 0

1The public sector comprises the central government, the local government, the social security fund and all other extrabudgetary funds and the Bulgarian National Bank.
2The term "debt" has the meaning set forth in point No. 9 of the IMF Guidelines on Performance Criteria with Respect to Foreign debt adopted on August 24, 2000 (Executive Board Decision No. 12274-(00/85)). Excluded from this performance criterion are (i) normal import-related financing credits; and (ii) outstanding balances under bilateral payments arrangements. Debt and commitments falling within the ceilings shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective.
3The ceilings apply to debt with original maturities of up to and including one year. The actual stock of short-term debt outstanding (according to this definition) as of December 31, 2002 was zero.
4The ceilings apply not only to "debt," but also to commitments contracted or guaranteed for which value has not been received.
5Gross value of Eurobond issuance, net of the cumulative value of own tradable external debt acquired by the general government in 2003 up to the test date, whether through separate transactions, or in a debt exchange operation. Operations will be valued at the market value on the day of the transaction. Following the end of each quarter, the Minister of Finance will report to the IMF: (i) the contracting and guaranteeing of external debt falling both inside and outside the ceilings, and (ii) the amount of own tradable external debt acquired by the general government. Following the end of each month, information on the contracting and guaranteeing of external debt falling both inside and outside the ceilings will be reported to the IMF by the Ministry of Finance


Indicative Ceilings on Changes to Rescheduled and New Arrears
Owed to Bulgargaz and NEK
  Bulgargaz NEK

  (In millions of leva)
Outstanding as of October 31, 2002 0 1.87
Maximum accumulation of new arrears from level on October 31, 2002    
   March 31, 2003 0 0
   June 30, 2003 0 0
   September 30, 2003 0 0
   December 31, 2003 0 0

1For the purpose of assessing compliance with these indicative targets:
  • Arrears are defined to include overdue payments of more than three months after the normal settlement period. Arrears are defined to include interest and penalties.
  • Arrears will not include new interest and penalties accruing for enterprises that enter into bankruptcy or liquidation nor arrears of companies that have been disconnected.
  • The indicative targets apply separately for Bulgargaz and NEK.
  • A number of public or state-owned companies or entities will be excluded from the indicative targets because they are being restructured: arrears owed by the district heating companies and public hospitals will be excluded from the indicative target for Bulgargaz, and arrears owed by the railways infrastructure company (BDZ infrastructure) will be excluded from the indicative target for NEK. All other public sector entities will be included.
  • The Ministry of Finance shall provide to the IMF detailed entity-by-entity data on the stock of arrears owed to Bulgargaz and NEK separately on a monthly basis. The submission shall comprise of all delinquent customers including those that are excluded for the purpose of assessing compliance with these indicative targets. In addition, the submission shall include brief explanations of actions taken by Bulgargaz and NEK against customers who have defaulted on the payment of rescheduled arrears.