IMF Executive Board Completes Second Review Under Stand-By Arrangement for Bulgaria

Press Release No. 06/70
April 4, 2006

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Bulgaria's economic performance under the Stand-By Arrangement. In completing the review, the Board approved the authorities' request for a waiver for the non-observance of the end-September 2005 structural performance criteria on the selection of winning bids for the sale of three large thermal electricity companies, the adoption by parliament of the National Revenue Agency procedural code and the incorporation into the budgetary payments system of all lev-denominated expenditure accounts of the judicial system. The Board approved the authorities' request to merge the third and fourth reviews under the Stand-By Arrangement and postpone the third review under the arrangement until no later than September 5, 2006.

The 25-month Stand-By Arrangement was approved on August 6, 2004 (see Press Release No. 04/175 ) for an amount equivalent to SDR 100 million (about US$144.1 million). The completion of the second review enables the release of SDR 78 million (about US$112.4 million). The authorities continue to treat the arrangement as precautionary.

Following the Executive Board discussion, Ms. Anne O. Krueger, First Deputy Managing Director and Acting Chair, said:

"The Bulgarian authorities' economic program for 2006 aims at continued strong economic growth, dealing with the large increase in the external imbalance and the increase in inflation that occurred in 2005, and strengthening the balance sheets of the government and the commercial banks. The program relies on measured fiscal tightening, restrained incomes policies, a further reduction of credit growth to slow the expansion of domestic demand, and structural policies to stimulate supply.

"The authorities' 2006 fiscal program aims at an increase in the general government surplus. To achieve this, the authorities are determined to avoid revenue losses in the wake of ongoing reforms of the revenue administration, keep expenditure to the agreed limit by enforcing the planned cuts in discretionary expenditure, and resist pressure for raising spending in other areas. The authorities are committed to tighten the fiscal stance further if the current account does not improve as envisaged under the program.

"Incomes policies under the program include wage restraint in the government and selected state enterprises and no change of the minimum wage during the remainder of 2006. These measures and recent and prospective reductions of nonwage labor costs are expected to underpin competitiveness.

"Financial deepening will continue. Specifically, the Bulgarian National Bank has extended the limits on banks' credit expansion until the end of 2006 and raised the penalties for banks exceeding them in an effort to limit credit growth. New prudential measures will restrain the growth of household credit and strengthen banks' balance sheets. As the credit limits are encouraging the growth of nonbank financial intermediation, the authorities have introduced reporting requirements for leasing companies and are in the process of strengthening nonbank supervision.

"The program aims to expand supply through a number of structural measures, including judicial reform in the context of EU accession, a new business register, health and education reform, steps to make the labor market more flexible, and the privatization and concessioning of state assets. The firm implementation of these measures is important for ensuring continued high rates of growth and a reduction of the macroeconomic imbalances," Ms. Krueger said.



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