Statement by IMF Staff Mission to Bulgaria

Press Release No. 06/291
December 20, 2006

The following statement was issued on December 19, 2006 in Sofia at the conclusion of an International Monetary Fund (IMF) staff mission:

"The IMF mission that visited Bulgaria during December 13-19, 2006 held discussions on the fourth and final review of the Stand-By Arrangement (SBA) approved by the IMF's Executive Board on August 6, 2004, and due to expire in March 2007. These discussions focused on program implementation to date and economic policies for 2007. We thank the Bulgarian authorities for their cooperation and hospitality.

"Economic growth remains strong but the large current account deficit warrants vigilance. We now expect real GDP growth to reach 6.2 percent in 2006 and remain at a similar level in 2007, supported by sustained bank credit growth and EU accession-related flows. Thus far there are a few signs of overheating, with inflation falling more rapidly than previously anticipated and wages growing broadly in line with productivity. However, the external current account deficit is expected to widen to 15 percent of GDP in 2006—exceeding projections—due to delayed restructuring by producers of steel and copper, and to remain broadly unchanged in 2007. While FDI will continue to provide large cover (about 80 percent) of the current account deficit, gross private external debt could reach 77 percent pf GDP by end-2007.

"Implementation of the program has been good, with a few exceptions, and some of the earlier delays have been or are being addressed. The government ran a prudent fiscal policy, and on current execution trends the estimated fiscal surplus would reach 3½ percent of GDP in 2006. Implementation of structural reforms under the program, however, slipped in 2006. There has been progress in some areas, such as streamlining the public sector, but the start-up of operations of the electronic business registry was delayed significantly and privatization-related in the energy sector deadlines were extended. Other elements of the structural reform program, such as the implementation of the IT system of the National Revenue Agency, remain to be completed. More broadly, the government will need to continue to pursue the broad agenda of enhancing labor market flexibility, and reforms in the energy, health, and education sectors.

"The mission and the authorities have agreed, subject to IMF Management and Executive Board approval, on economic policies for the remainder of the program period and next year. The mounting underlying vulnerabilities accompanying the persistently large current account deficit warrant a continuing cautious stance of fiscal policy. To this end, the government will target a fiscal surplus of at least 2 percent of GDP in 2007, and be prepared to increase this surplus in the event that the current account deficit widens significantly. Structural reforms to be pursued in the remainder of the program include the operation of the business register, the municipal borrowing register, and a new information technology system to improve tax administration.

"Beyond the program period, maintaining sound macroeconomic policies and sustaining the reform effort will remain key to support the currency board arrangement and to benefit fully from EU accession."



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