## _cr11179 ## Source details **Canonical URL:** [_cr11179](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11179.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11179.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11179.pdf.json) --- ### Exports: developments and prospects - Export volumes: - Increased by 12 percent on average in 2000–08, and by 9 percent in 2010. - Manufacturing export volumes increased by more than 15 percent during 2000–08. - Composition and markets: - Investment goods became the lead component within manufacturing exports by the mid-2000s; strong recovery since 2009 indicates capacity for continued expansion. - EU accounts for more than 60 percent of exports (about 65 percent of investment goods, 75 percent of consumption goods, and 60 percent of commodities). - Other European countries: 25 percent share in exports (mainly commodities and energy). - Exports to Asia: 9 percent of total but increasing, especially investment goods. - Top country shares: Germany 11 percent, Italy 10 percent, Romania 9 percent, Turkey 9 percent. - Market share and FDI: - Bulgaria’s share in world imports almost doubled over the last 10 years; recent increase in market share among the highest in the region. - Gradual increase in manufacturing FDI stock instrumental in boosting export volumes; sustained strong FDI to manufacturing is key for continued export buoyancy. ### I. Macroeconomic setting: sizeable and rapid adjustment - Growth and recovery: - After contracting 5.5 percent in 2009, economic growth stabilized in 2010 with 0.2 percent real GDP growth. - Q1 2011: real GDP growth expanding by 1½ percent; exports remained the sole driver of growth while consumption and investment continued to contract. - Current account and external indebtedness: - Current account deficit retreated from 23 to 1 percent of GDP between 2008 and 2010. - On a 12-month rolling basis, it registered a surplus of 1.6 percent of GDP by Q1 2011. - Total external indebtedness reduced to 93½ percent of GDP by end-March (2011). - Large capital outflows as banks and the private sector deleveraged; outflows more than offset by FDI inflows which remained positive. - Prices, labor, and fiscal: - Headline HICP inflation eased to 3.3 percent y/y in April 2011. - Registered unemployment peaked at 10.3 percent in 2010; labor force data suggest it rose to about 12 percent in Q1 2011. - 2010 deficit (ESA95 basis) contained to 3.2 percent of GDP (target of 3.8 percent of GDP). - Public debt low at 16.2 percent of GDP. - Financial sector and assets: - CDS spreads have halved relative to mid-2010. - Residential real estate prices are 35 percent below their Q3 2008 peak. - Banking sector: system average CAR 17.7 percent at end-March; NPLs reached 12.9 percent by end-March 2011; provisions to loans about 70 percent; credit grew by 1.3 percent in 2010. ### II. Outlook: recovery, projections, and risks - Near-term projections: - Real GDP expected to grow by 3 percent in 2011. - GDP growth expected to rise to 3½ percent in 2012. - Average HICP inflation projected at 4¼ percent in 2011, falling back to about 3 percent in 2012. - Quick reduction in unemployment is unlikely. - Medium-term projections: - Real GDP growth expected to converge to about 4 percent over the medium term. - Real GDP expected to regain its 2008 peak in 2012 and the output gap to close by 2016. - By 2016, per capita income levels would only be 40 percent GDP of the euro area average. - External vulnerabilities and financing needs: - Total financing need of about 25½ percent of GDP for 2011. - About 23½ percent of GDP reflects rollover of private sector debt, including parent bank support of just over 3 percent of GDP. - International reserves in excess of minimum coverage under the currency board fell from 28 percent of total deposits at end-2008 to 22 percent in April 2011. - Risk assessment: - Risks tilted to the downside, notably financial spillovers from tensions in the euro area periphery. - Exports to the euro area periphery comprise just under 10 percent of total exports. - Upside potential exists if exports surprise, confidence improves, or EU funds absorption exceeds expectations; large-scale capital inflows could test the current account correction. ### III. Policy challenges and recommendations - Overall objectives: - Bolster longer-term growth prospects while sustaining resilience to shocks to reinforce the currency board arrangement (CBA) as the bridge to eventual euro adoption. - Increase fiscal and financial sector buffers; accelerate structural reforms; make spending more growth-supportive and sustainable; safeguard financial system soundness. - Structural reform priorities: - Competitiveness: REER broadly in line with fundamentals per CGER-valuation range. - Labor market and wages: Wage growth moderated and broadly in-line with productivity growth. - Key bottlenecks: infrastructure, education, technology adaptation, burdensome administrative procedures, judicial inefficiencies. - Governance: Worldwide Governance Indicators and Corruption Perception Indices point to governance and corruption remaining a challenge. - National Reform Program (NRP): targets reforms to amplify competitiveness by increasing returns to investment in export-oriented industries. ### Labor productivity, skills matching, and labor market policies (Section 16) - Productivity and skills mismatch: - Greatest potential for productivity gains is in "young low skilled unemployed" where a skills mismatch prevents hiring into vacancies. - Near-term measures (using EU social funds): - Job placement services. - Targeted vocational training programs. - Longer-term measures: - Active coordination of tertiary and vocational education with employers’ needs (especially in tradeables sectors). - Expansion of apprenticeships. - Social security: - Social security contributions need to be compatible with more flexible working arrangements to encourage participation. ### Administrative burden, public administration, and EU funds absorption - Administrative reforms: - Central government shed 12 percent of its workforce since mid-2009; more cuts expected in 2011 to create space for performance-based remuneration. - Bulgaria set to achieve its 2012 goal of reducing the administrative burden on firms by 20 percent (central government reforms). - Remaining municipal-level burdens: registration, licensing, and permits. - Suggested reforms: universal internet-based system, simplification of contract enforcement, training of municipal authorities, judicial reform. - EU funds: - EU funds allocated for 2007–13: €9.4 billion (about 26 percent of 2010 GDP, excluding about €2 billion national co-financing). - Disbursements by end-2010: 10 percent of the total. - Government 2011 absorption aim: €770 million (equal to total absorption for 2007–10). - Potential impact: efficient use could boost potential GDP growth by 0.30 -1.43 percent per year in 2007–13; potential boost rising to about 3 percent in 2017–25. - Causes of low absorption: compliance and control weaknesses, cumbersome procedures, beneficiary capacity gaps, tender/expropriation/environment/payment issues. - Recent improvements: high government priority, appointment of special EU Funds Minister, streamlining of controls, proposed Public Procurement Act amendments. - Further recommendations: partnerships with private parties, address municipal-level weaknesses, speed up ex-ante controls and project preparation, railway sector restructuring. ### Exchange rate and external position (REER findings) - External adjustment in 2010 reduced current account deficit below projected medium-term underlying value. - Sudden stop in capital inflows (peaked at 42 percent of GDP in 2007) corrected the absorption gap via a sharp decline in domestic demand. - CGER-type estimates: REER broadly in line with fundamentals. - Macro-sustainability and equilibrium approaches: - Macroeconomic balance: REER slightly undervalued by about ¼ percent. - External sustainability approach: REER undervalued by 3.4 percent (to stabilize IIP at -70.9 percent of GDP). - Equilibrium REER methodology: overvaluation of 3.9 percent. ### Fiscal policy: targets, medium-term objectives, and recommendations - 2011 fiscal targets and stance: - 2011 budget deficit target: 2.5 percent of GDP (ESA 95 terms). - Emphasis on rapid exit from the EU excessive deficit procedure (EDP) and ensuring low public debt. - Protect growth-enhancing capital outlays if expenditure cuts necessary; if revenue outperforms, save to boost fiscal reserve. - Medium-term objective: - Revised medium-term fiscal objective: 0.6 percent deficit (previously a 0.5 percent surplus). - Convergence Program envisages reaching this target by 2014. - Implied total adjustment: about 2 percent of GDP between 2012 and 2014; could be about ½ percent higher under conservative revenue assumptions. - Consolidation strategy and institutional reforms: - Continue expenditure restraint, tight spending ceilings, extension of wage and pension bill freezes through end-2012. - New ceilings on government liabilities and possible constitutional deficit ceiling (Financial Stability Pact): constitutional deficit ceiling two percent; pact limits expenditures to 40 percent of GDP; changes in direct taxes subject to constitutional majority. - Recommendation to complement the Pact with a transparent fiscal rule linking policy to a prudent estimate of potential growth and supported by an independent institution. - Fiscal measures to increase efficiency (priorities): - Health care: drug procurement reforms, rationalize hospital sector, improve information systems. - Public administration: performance-based remuneration within existing payroll envelope; extend central government achievements to autonomous units and municipalities. - Pensions: 2010 reform yielded 0.6 percent of GDP savings per year; annual deficit about 4 percent of GDP remains; further measures needed post-2016 (increase retirement age, link to life expectancy, less generous indexation, raise second pillar contribution rates, harmonize pension treatment). ### Public pension reform (Box 4) - Pension outlays: 10 percent of GDP. - 2010 reform (agreed November 2010): - Increased contribution rate by 1.8 percentage points from 2011. - Increased service requirement for a full pension by four months each year from 2012 until 2020. - Gradual increase in retirement age to 65 years for men and 63 years for women over the next two decades. - Further recommendations: - Short-run: more ambitious increases in contribution rate and service requirement plus tightened disability controls could reduce pension deficit by about 1 percent of GDP. - Medium-term: additional 4 percent of GDP savings via retirement age increase to 66 linked to life expectancy, less generous indexation, raising second pillar rates, phase-out of overly generous early retirement pensions. - Complementary reforms: remove investment restrictions and develop an annuities market. ### Banking system: stability, vulnerabilities, and contingency planning - System overview: - Banking system described as stable and well capitalized but operating in a challenging environment. - Exposure concentration: euro area periphery banks hold 28½ percent of banking system assets and 25¼ percent of non-financial corporate and household deposits. - Asset quality and buffers: - NPLs to total gross loans: 12.9 percent by end-March 2011. - BNB estimates NPLs expected to peak in late 2011 then gradually decline; protracted recovery could delay decline. - All banks exhibit CAR above 12 percent; system average CAR 17.7 percent at end-March. - Provisions, collateral, and expected profit recovery should allow absorption of losses while maintaining capital adequacy. - Liquidity and parent support: - Loan-to-deposit ratio improved but remains high for some foreign-owned banks. - Liquid-assets to short-term liabilities: 30.6 percent (system). - Banks required to have 15 percent coverage ratio of deposits by liquid assets. - Gross international reserves in excess of minimum coverage under CBA represent 22 percent of banking system deposits. - Parent bank support proved crucial in 2009; BNB continues to receive assurances from parents. - Supervisory posture and resolution: - Restructured loans should be monitored for appropriate provisioning and collateral valuation. - Regulatory easing during crisis can be reversed as recovery strengthens. - Legal framework for bank resolution should be comprehensively reviewed to ensure sufficient tools for potential resolutions. - Authorities participate in forthcoming European contingency planning framework; stress testing methodologies being improved. - Staff appraisal highlights: - Preserve and rebuild international and fiscal reserves. - Continued close monitoring of banks and coordination with home supervisors and MOF. - As recovery gathers pace, reverse crisis-era regulatory easing gradually. ### External and public debt sustainability (Appendix I) - External debt trends and composition: - Private external debt rose from about 20 percent of GDP in 2003 to more than 90 percent of GDP as of end-2010. - Public sector external debt fell from 35 percent of GDP in 2003 to 8 percent of GDP in 2010. - External debt peaked at 108 percent of GDP in 2009; declined to 93½ percent of GDP at end-March (2011). - About 40 percent of external debt is intra-company lending; rollover rates for intra-company lending averaged 170 percent during 2008–10. - Medium-term projections and stress tests: - Baseline: external debt projected to fall to less than 70 percent of GDP by 2016. - Historical scenario: fall to about 60 percent of GDP by 2016. - Combined persistent shocks (permanent 1/4 standard deviation to interest rate, growth, and CA) raise external debt to 83 percent of GDP by 2016. - One-time 30 percent real depreciation in 2012 could raise external debt to 100 percent of GDP in the figure summary. - Public debt: - Gross public sector debt below 20 percent of GDP in baseline. - Public sector debt (percent of GDP): 15.5 (2008); 15.6 (2009); 17.4 (2010); 17.5 (2011); 20.6 (2012); 21.0 (2013); 20.6 (2014); 20.8 (2015); 21.3 (2016). - Public debt-to-revenue ratio: 40.6 (2008); 44.2 (2009); 53.1 (2010); 53.7 (2011); 61.5 (2012); 61.7 (2013); 61.5 (2014); 62.1 (2015); 64.1 (2016). - Assumptions underlying baseline: - Real GDP growth: 6.0 (2008); -5.0 (2009); 0.0 (2010); 2.0 (2011); 4.0 (2012); 4.0 (2013); 5.0 (2014); 3.9 (2015); 4.0 (2016). - Average nominal interest rate on public debt: 5.2 (2008); 4.9 (2009); 4.6 (2010); 4.7 (2011); 5.4 (2012); 5.6 (2013); 4.6 (2014); 4.4 (2015); 4.1 (2016). - Inflation (GDP deflator): 8.4 (2008); 4.3 (2009); 3.0 (2010); 4.0 (2011); 3.4 (2012); 2.3 (2013); 2.4 (2014); 2.5 (2015); 2.5 (2016). - Policy implications: - Deleveraging underway; composition (intra-company lending) mitigates rollover risks. - Maintain prudent fiscal policies to preserve low public indebtedness and support CBA. - Monitor and manage contingent liabilities; continue policies supporting current account adjustment and growth. - Preserve financial stability and capital buffers given private-sector external indebtedness. ### Fiscal operations, tables, and projections (general government) - Selected Statement of Operations (in millions of leva, selected years): - Revenue: 26,359 (2008); 24,087 (2009); 23,053 (2010); 24,680 (2011); 27,027 (2012); 29,217 (2013); 30,578 (2014); 32,404 (2015); 34,344 (2016). - Expenditure: 24,369 (2008); 24,714 (2009); 25,834 (2010); 26,538 (2011); 28,589 (2012); 30,303 (2013); 31,456 (2014); 33,233 (2015); 34,930 (2016). - Net lending/borrowing (cash basis): 1,990 (2008); -627 (2009); -2,781 (2010); -1,858 (2011); -1,562 (2012); -1,086 (2013); -878 (2014); -829 (2015); -586 (2016). - Primary balance: 2,575 (2008); -106 (2009); -2,295 (2010); -1,274 (2011); -837 (2012); -170 (2013); -65 (2014); -162 (2015); 27 (2016). - Memorandum: - Fiscal reserve account: 8,382 (2008); 7,673 (2009); 6,012 (2010); 4,827 (2011). - Gross debt: 10,710 (2008); 10,641 (2009); 12,240 (2010); 13,249 (2011); 16,609 (2012); 18,032 (2013); 18,803 (2014); 20,138 (2015); 22,018 (2016). - Percent of GDP ratios (selected): - Revenue: 38.0 (2008); 35.3 (2009); 32.7 (2010); 32.7 (2011); 33.5 (2012); 34.1 (2013); 33.6 (2014); 33.4 (2015); 33.2 (2016). - Expenditure: 35.2 (2008); 36.2 (2009); 36.7 (2010); 35.2 (2011); 35.4 (2012); 35.4 (2013); 34.5 (2014); 34.3 (2015); 33.8 (2016). - Net lending/borrowing: 2.9 (2008); -0.9 (2009); -3.9 (2010); -2.5 (2011); -1.9 (2012); -1.3 (2013); -1.0 (2014); -0.9 (2015); -0.6 (2016). - Gross debt (percent of GDP): 15.5 (2008); 15.6 (2009); 17.4 (2010); 17.5 (2011); 20.6 (2012); 21.0 (2013); 20.6 (2014); 20.8 (2015); 21.3 (2016). ### Country Partnership Strategy (CPS), World Bank, and IFC engagement - CPS objectives (Bank Board discussed May 17, 2011) aligned with National Reform Program and Europe 2020 Strategy, focused on: - (i) policy reforms for NRP implementation, - (ii) strategies and institutions to accelerate EU funds absorption, - (iii) complementing EU financing. - Active World Bank portfolio: 4 operations totaling US$ 353 equivalent. - Historical IBRD lending: 46 operations with total original commitment US$3,003 million equivalent (15 adjustment loans US$1,725.8 million; 24 investment projects US$1123 million; one debt reduction loan US$125 million; others). - IFC: 30 projects with commitments over US$ 660 million as of April 30, 2011; notable investments include renewable energy (largest wind park), Galata gas field development, SME finance support, and manufacturing modernization. ### Data, statistics, and dissemination - Data provision generally adequate for surveillance; Bulgaria participates in SDDS since 2003. - National accounts compiled per SNA 1993 and ESA 1995; quarterly GDP flash estimates 45 days after reference period; final figures after ~5 quarters. - Price indices: CPI (from 1995), PPI (from 2000), HICP (from 2005). - Improvements ongoing in customs data processing, export/import unit value indices, and coordination between NSI and BNB. - Balance of payments: quarterly BOP statistics disseminated in IFS on timely basis; INTRASTAT used since EU accession. ### Balance of payments, recent macro developments, and Executive Board assessment - Recovery and projections: - Q1 GDP growth: 3.4 percent y/y (0.6 percent q/q). - Real GDP projected: 3.0 (2011 proj.); 3.5 (2012 proj.). - Medium-term growth expected to recover to about 4 percent. - External sector: - Current account deficit: -23.0 (2008); -8.9 (2009); -1.0 (2010); -0.6 (2011, proj.); -1.0 (2012, proj.). - Gross external debt: 104.9 (2008); 108.0 (2009); 101.8 (2010); 94.2 (2011, proj.); 90.6 (2012, proj.). - Inflation and labor: - HICP: 12.0 (2008); 2.5 (2009); 3.0 (2010); 4.2 (2011, proj.); 3.1 (2012, proj.). - Unemployment: 5.7 (2008); 6.9 (2009); 10.3 (2010); 9.7 (2011, proj.); 9.0 (2012, proj.). - Executive Board recommendations: - Commended sound policies and export-led recovery. - Emphasized rebuilding policy buffers and accelerating reforms to boost resilience and medium-term growth. - Fiscal: strengthen tax compliance, resist spending pressures, consider complementary fiscal rule to Financial Stability Pact. - Financial sector: continue vigilance on NPLs and parent institution ties; develop contingency plans; reverse prudential easing as recovery allows. - Structural reforms: reduce skills mismatch, administrative burdens, strengthen legal system, improve EU funds absorption. *Source: IMF staff report — _cr11179 (selected excerpts)._* ### 1. Exports: Developments and Prospects ### 1. Exports: Developments and Prospects ### I. Macroeconomic setting: sizeable and rapid adjustment - After contracting 5.5 percent in 2009, economic growth stabilized in 2010 with 0.2 percent real GDP growth. - The recovery proceeded in Q1 2011, with real GDP growth expanding by 1½ percent; exports remained the sole driver of growth while consumption and investment continued to contract. - Current account adjustment: - Current account deficit retreated from 23 to 1 percent of GDP between 2008 and 2010. - On a 12-month rolling basis, it registered a surplus of 1.6 percent of GDP by Q1 2011. - External indebtedness and capital flows: - Total external indebtedness reduced to 93½ percent of GDP by end-March (year implied: 2011). - Large capital outflows as banks and the private sector deleveraged; these outflows were more than offset by FDI inflows which remained positive throughout the downturn. - Financial and asset markets: - CDS spreads have halved relative to mid-2010. - Residential real estate prices are 35 percent below their Q3 2008 peak but show signs of stabilization in larger urban areas. - Inflation and labor market: - Headline HICP inflation eased to 3.3 percent y/y in April 2011. - Registered unemployment peaked at 10.3 percent in 2010; labor force data suggest it continued to rise to about 12 percent in Q1 2011. - Job destruction most severe in manufacturing, services and construction; output per worker increased by 6.4 percent in 2010. - Fiscal position and public finance: - 2010 deficit (ESA95 basis) contained to 3.2 percent of GDP (target of 3.8 percent of GDP) through expenditure-led adjustment. - Arrears accumulated by end-2009 (1 percent of GDP) were almost halved. - Pension reform raised the contribution rate, increased service period and the retirement age. - Fiscal reserve by end-2010 was almost half its pre-crisis level. - Public debt remained low at 16.2 percent of GDP. - Banking sector soundness: - All banks have a capital adequacy ratio (CAR) of over 12 percent (system average 17.7 percent at end-March). - Nonperforming loans (NPLs) reached 12.9 percent by end-March 2011. - Ratio of provisions to loans about 70 percent. - Credit grew by 1.3 percent in 2010. - System-wide loan-to-deposit ratio fell to 113 percent; ratio of liquid assets to short-term liabilities stands at 30.6 percent. - Non-bank financial sector: - Insurance companies and pension funds’ assets rose in 2010; at 9.7 percent of GDP they are one-tenth of banking sector assets. - Solvency ratio of the non-life insurance sector was 187 percent at end-2010. ### Box 1 — Exports: developments and prospects (key findings) - Long-term export performance: - Export volumes increased by 12 percent on average in 2000–08, and by 9 percent in 2010. - Manufacturing export volumes increased by more than 15 percent during 2000–08. - Composition and markets: - Investment goods became the lead component within manufacturing exports by the mid-2000s; strong recovery since 2009 indicates capacity for continued expansion. - EU accounts for more than 60 percent of exports (about 65 percent of investment goods, 75 percent of consumption goods, and 60 percent of commodities). - Other European countries: 25 percent share in exports (mainly commodities and energy). - Exports to Asia: 9 percent of total but increasing, especially investment goods. - Top country shares: Germany 11 percent, Italy 10 percent, Romania 9 percent, Turkey 9 percent. - Market share and FDI: - Bulgaria’s share in world imports almost doubled over the last 10 years; recent increase in market share among the highest in the region. - Gradual increase in manufacturing FDI stock was instrumental in boosting export volumes; sustained strong FDI to manufacturing is key for continued export buoyancy. ### II. Outlook: recovery faces headwinds and risks remain elevated - Near-term projection: - Real GDP expected to grow by 3 percent in 2011 as export growth remains strong. - GDP growth expected to rise to 3½ percent in 2012 as investment and consumption strengthen later in 2011 and in 2012. - Average HICP inflation projected at 4¼ percent in 2011, falling back to about 3 percent in 2012. - Quick reduction in unemployment is unlikely given the moderate speed of recovery. - Medium-term projection: - Real GDP growth expected to converge to an average rate of about 4 percent over the medium term. - Real GDP expected to regain its 2008 peak in 2012 and the output gap to close by 2016. - By 2016, per capita income levels would only be 40 percent GDP of the euro area average. - External vulnerabilities: - Total financing need of about 25½ percent of GDP for 2011 (Appendix Table I.1). - About 23½ percent of GDP reflects the rollover of private sector debt, including parent bank support of just over 3 percent of GDP. - International reserves in excess of minimum coverage under the currency board have fallen from 28 percent of total deposits at end-2008 to 22 percent in April 2011. - Risks: - Risks are tilted to the downside, notably financial spillovers from tensions in the euro area periphery given significant presence of foreign-owned banks. - Exports to the euro area periphery comprise just under 10 percent of total exports. - Upside potential exists if exports surprise, confidence improves, or EU funds absorption exceeds expectations; however, a return of large-scale capital inflows could test the current account correction. ### III. Policy challenges: managing risks while reinvigorating growth - Overall policy objective: - Bolster longer-term growth prospects while sustaining resilience to shocks to reinforce the currency board arrangement (CBA) as the bridge to eventual euro adoption. - Increase fiscal and financial sector buffers to enhance capacity to counter potential shocks. - Accelerate structural reforms, make spending more growth-supportive and sustainable, and safeguard financial system soundness. - Structural reform priorities (to reignite reform momentum): - Competitiveness: CGER-valuation range and export performance suggest the real exchange rate is broadly in line with fundamentals. - Labor market and wages: Wage growth moderated amid rising unemployment and is now broadly in-line with productivity growth. - Identified bottlenecks: infrastructure, education, technology adaption, burdensome administrative procedures, and judicial inefficiencies. - Governance challenges: Worldwide Governance Indicators and Corruption Perception Indices point to governance and corruption remaining a challenge. - National Reform Program (NRP): appropriately targets reforms to amplify competitiveness by increasing returns to investment in export-oriented industries. *Source: IMF staff report — _cr11179 - 1. Exports: Developments and Prospects_* ### 16. Increased labor productivity and better skills matching will help lift growth ### 16. Increased labor productivity and better skills matching will help lift growth ### Labor productivity, skills matching, and labor market policies - Greatest potential for productivity gains is in "young low skilled unemployed" where a skills mismatch prevents hiring into vacancies. - Near-term measures being scaled up using EU social funds: - Job placement services. - Targeted vocational training programs. - Longer-term measures recommended: - Active coordination of tertiary and vocational education with employers’ needs (especially in tradeables sectors). - Expansion of apprenticeships. - Social security contributions need to be made compatible with more flexible working arrangements to encourage participation. ### Administrative burden and public administration reforms - Bulgaria is set to achieve its 2012 goal of reducing the administrative burden on firms by 20 percent, based on central government reforms. - Remaining challenges: - Municipal registration, licensing, and permit requirements remain burdensome. - Suggested reforms: - A universal internet-based system to reduce compliance costs, increase transparency, and help reduce corruption. - Simplification of contract enforcement rules, training of municipal authorities, and judicial reform to improve enforcement. - Public administration actions to date: - Central government shed 12 percent of its workforce by closing obsolete agencies and reforming customs and security forces since mid-2009. - More cuts expected in 2011 to create space for performance-based remuneration without increasing the overall payroll envelope. - Need to expand achievements to autonomous spending units, particularly municipalities. ### EU funds absorption and infrastructure - EU funds allocated to Bulgaria for 2007–13: €9.4 billion, or about 26 percent of 2010 GDP (excluding about €2 billion in national co-financing). - Disbursements by end-2010: 10 percent of the total. - Comparison: Latvia and Lithuania had about 30.0 and 29.0 percent disbursed between 2007–10. - Government aim for 2011 absorption: €770 million (equal to total absorption for 2007–10). - Potential macroeconomic impact: - Efficient use of social and cohesion funds could boost potential GDP growth by 0.30 -1.43 percent per year in 2007–13. - Potential boost rising to about 3 percent in 2017–25. - Causes of low absorption: - Compliance reports and control systems initially not observing EC requirements. - Cumbersome application and procurement procedures. - Beneficiaries lacking capacity for timely project preparation and facing long payment lags. - Problems with tender procedures, expropriation for land, environmental estimates, and financial irregularities. - Recent improvements (second half of 2010): - High government priority, various administrative reforms, appointment of a special EU Funds Minister to improve coordination. - Streamlining of controls, strengthened verification controls and audit, and tackling coordination barriers across government agencies. - Proposed amendments to the Public Procurement Act to streamline tendering for EU-funded projects. - Further recommended reforms: - Establish partnerships with private parties involved in the process. - Address weaknesses in application and implementation processes at the municipal level. - Speed-up ex-ante controls in bidding documentation. - Shorten preparation phase of large infrastructure and environment projects. - Proposed restructuring of the railway sector (supported by the World Bank) to modernize the rail network and enhance regional connectivity. ### Exchange rate and external position (summary from REER/Boxes) - The external adjustment in 2010 reduced the current account deficit below its projected medium-term underlying value. - Sudden stop in capital inflows—which peaked at 42 percent of GDP in 2007—largely corrected the absorption gap through a sharp decline in domestic demand; current account deficit moved close to balance in 2010. - CGER-type estimates suggest the REER is broadly in line with fundamentals; a macroeconomic balance approach suggests the REER is slightly undervalued by about ¼ percent. - The external sustainability approach suggests the REER is undervalued by 3.4 percent; this approach assesses adjustment needed to stabilize the international investment position at a medium-term value of negative 70.9 percent of GDP under current projections. - The equilibrium REER methodology points to an overvaluation of 3.9 percent. ### Fiscal policy: growth-enhancing adjustment - 2011 fiscal objectives and stance: - 2011 budget deficit target: 2.5 percent of GDP (ESA 95 terms). - Emphasis on securing a rapid exit from the EU excessive deficit procedure (EDP) and ensuring low public debt. - Need to sustain efforts to counter tax and social security evasion and resist pressures for generalized wage and pension hikes. - Targeted increases in minimum social benefit payments recommended as more effective protection for vulnerable groups; could be financed through the budget contingency. - If expenditure cuts are necessary, protect growth-enhancing capital outlays while controlling new commitments. - If revenue over-performs, additional funds should be saved to boost the fiscal reserve. - Medium-term fiscal objective: - Revised medium-term fiscal objective: 0.6 percent deficit (previously a 0.5 percent surplus); still consistent with a continued decline in debt. - Convergence Program (CP) envisages reducing the fiscal deficit to achieve this target by 2014. - Implied total adjustment: about 2 percent of GDP between 2012 and 2014; under more conservative revenue assumptions, the adjustment could be about ½ percent higher. - Recommendation: Aim for some safety margin relative to the consolidation target; consider a more ambitious objective of a small surplus depending on recovery pace after 2014. - Consolidation strategy: - Hinges on continued expenditure restraint and tight spending ceilings, including extension of wage and pension bill freezes through end-2012. - New ceilings on government liabilities will be crucial to control spending commitments. - Measures to increase spending efficiency (priorities): - Health care: - Recent reforms in drug procurement expected to improve cost control, access, and pricing of pharmaceuticals. - Streamlining responsibilities between the Ministry of Health and the National Health Insurance Fund. - Complementary steps: rationalize the hospital sector (reducing overcapacity) and improve information systems. - Public administration: - Maintain spending control while introducing performance-based remuneration to attract skilled staff within the existing payroll envelope. - Expand central government achievements to autonomous spending units and municipalities. - Pensions: - 2010 pension reform yielded 0.6 percent of GDP in savings per year. - An annual deficit of about 4 percent of GDP remains; the contribution-benefit gap will widen as population ages and a higher pension accrual rate kicks in after 2016. - Further measures needed to reduce the sizeable post-2016 deficit, including increases in retirement age and service period, linking them to life expectancy, and anchoring benefit increases to developments in pension contributions. - Fiscal institutions and rules: - Authorities plan to adopt a constitutional deficit ceiling as part of a "Financial Stability Pact": - Constitutional deficit ceiling: two percent. - Pact limits expenditures to 40 percent of GDP. - Changes in direct taxes subject to a constitutional majority vote. - Concerns: the high bar to change direct taxes risks limiting flexibility on the revenue side. - Recommendation to complement the Pact with a simple, well-designed fiscal rule: - A transparent rule linking fiscal policy to a prudent estimate of potential growth, mechanisms to correct deviations, and creating savings in upswings should be included in the organic budget law. - Effectiveness enhanced by an independent institution that reviews the budget and evaluates reforms. - Options for fiscal rules (Box 5): - Growth-adjusted balance rule: - Advantages: Strong guidance throughout the cycle; smooth adjustment path towards balance target. - Disadvantages: Fairly complicated formula; limited countercyclicality. - Expenditure rule: - Advantages: Clear guidance for expenditure budgeting; prevents procyclical expansion; good track record in other countries. - Disadvantages: No guidance on revenue policies; difficult calibration. - Using historical outturns for 2002–10: - Growth-adjusted balance rule would have allowed a strong countercyclical fiscal response at the height of the crisis. - Expenditure rule would have accumulated higher buffers by preventing fiscal expansion in boom years, allowing slower consolidation after the shock. ### Public pension reform (Box 4) - Context: - Pension outlays: 10 percent of GDP. - Crisis revealed weaknesses: sharply declining contribution collections and a jump in benefit claims. - 2010 reform package (agreed November 2010): - Increased the contribution rate by 1.8 percentage points from 2011. - Increased the service requirement for a full pension by four months each year from 2012 until 2020. - Gradual increase in retirement age to 65 years for men and 63 years for women over the next two decades. - Assessment and further recommendations: - Short-run: More ambitious increases in contribution rate and service requirement should be coupled with tightened controls on disability pension beneficiaries — this could reduce the pension deficit by about 1 percent of GDP. - Medium-term: An additional 4 percent of GDP could be saved by a combination of: - Gradually increasing the retirement age to 66 years and linking it to life expectancy. - A change to a less generous indexation of benefits. - Raising second pillar contribution rates. - Harmonizing pension treatment across most professions, including phase-out of overly generous early retirement pensions. - Complementary reforms: Remove investment restrictions and develop an annuities market to boost returns on pension savings under the second and third pillars. ### Authorities’ views (summarized) - Priorities identified by authorities: reducing unemployment via improving labor force quality and increasing EU funds absorption. - Progress reported: - Administrative reforms contributed to a substantial increase in EU funds absorption; confidence in meeting targeted doubling of the absorption rate in 2011. - By making more effective use of EU social funds, training and employment opportunities for more than 100,000 workers have been created. - Amendments to the labor code in Parliament envisage greater flexibility for temporary and distance work. - Fiscal views: - Authorities maintain strict control over spending and are confident reforms will improve spending quality. - They emphasize a timely EDP exit and are standing firm against spending pressures; will re-evaluate space for targeted increases only if revenue surprises positively. - Confident the Financial Stability Pact would receive broad-based support; view the constitutional bar for changes in direct tax rates as assurance about tax regime stability while retaining flexibility via indirect taxes. - Plan to formulate a proposal for a fiscal rule by the fall. - Limited domestic institutional capacity and strong EU semester oversight reduce perceived scope for a fiscal council. - On pensions: want to first evaluate effects of recent reforms while acknowledging need to safeguard long-term financial viability. *Source: _cr11179 - 16. Increased labor productivity and better skills matching will help lift growth* ### 27. The banking system, while stable and well capitalized (Tables 6, 7), continues to ### The banking system, while stable and well capitalized (Tables 6, 7), continues to ### Banking system stability and external-link risks - The banking system is described as stable and well capitalized, but operating in a challenging environment. - Two-fold challenges: - Asset quality deterioration (increase in NPLs) amid a hesitant domestic demand recovery that keeps credit demand and profits low. - Regional uncertainty, financial spillovers, and potential reversal in parent bank funding. - Exposure concentration: - Euro area periphery banks hold 28½ percent of banking system assets and 25¼ percent of non-financial corporate and household deposits — making them particularly vulnerable to spillovers from tensions in their home country or parent banks. ### Asset quality, provisioning, and capital buffers - NPL outlook: - BNB’s estimates suggest NPLs are expected to peak in the later part of 2011 and then gradually decline. - A more protracted recovery could delay the decline; high unemployment and a weak property market pose ongoing risks to construction, real estate, and SME exposures. - Buffers and loss absorption: - Existing levels of provisions, collateral, and expected recovery in profits should allow the banking system to comfortably absorb such losses while maintaining high levels of capital adequacy. - All banks currently exhibit a CAR above 12 percent. - Monitoring and supervisory posture: - Restructured loans should be closely monitored to ensure appropriate provisioning and collateral valuation. - As the recovery strengthens, regulatory easing implemented during the crisis could be gradually reversed. ### Insolvency framework and credit growth - Weak credit growth largely reflects lack of demand (private sector deleveraging and reluctance to borrow despite lower lending rates). - Improvements that would strengthen credit growth include: - Clear criteria for initiation of insolvency proceedings. - Expedited court approval of pre-packaged restructuring plans. - Priority status for creditors who inject new capital into rehabilitation. - High legal fees, uncertainty about legal processes, and questionable loan recovery outcomes are slowing asset workout and constraining new lending. ### Regulatory stance, contingency planning, and resolution tools - Regulatory easing during the crisis (e.g., provisioning and certain risk weights) was appropriate to allow buffer utilization; authorities should rebuild buffers as recovery takes hold. - The conservative Bulgarian regulatory and supervisory regime should facilitate implementation of new Basel III requirements. - Bank resolution and weaker banks: - Weaker banks are closely monitored via more frequent reporting and supervisory visits. - Supervisory colleges under the European Financial Stability Framework have improved cooperation and information flows. - Recent transactions: sale of a Slovenian-owned bank completed; takeover of a mainly Irish-owned bank in the pipeline. - The recent crisis did not result in liquidations or recourse to the Deposit Insurance Fund (DIF). - The legal framework for bank resolution should be comprehensively reviewed to determine whether the BNB would have sufficient tools for potential resolutions. - Contingency planning: - Authorities are participating in design of a soon-to-be issued European contingency planning framework and improving stress testing methodologies. - The BNB and MOF are working together within the existing contingency planning framework to prepare for envisaged EU-wide changes. ### Liquidity, parent support, and reserve backstops - Loan-to-deposit dynamics: - The loan-to-deposit ratio of the system has improved but remains high for some (especially many foreign-owned) banks. - Ratio of liquid-assets to short-term liabilities has risen due to strong deposit growth. - Parent bank support: - On-going support pledged by parents proved crucial in 2009; BNB continues to receive assurances from parents to provide required capital and liquidity. - Regulatory liquidity buffers and backstops: - Banks are required to have a 15 percent coverage ratio of deposits from credit institutions, retail, and corporate customers by liquid assets. - Gross international reserves in excess of the minimum coverage required under the CBA represent 22 percent of banking system deposits, providing a further backstop. ### Authorities’ views on preparedness and tools - Authorities view the banking system as well-equipped to deal with vulnerabilities; BNB’s stringent stress tests demonstrate the adequacy of existing buffers. - They emphasize avoiding premature tightening when credit demand is weak and note the conservatism of the regulatory regime by international standards. - Liquidity tools: - Banks’ required reserves with the BNB provide an important line of defense. - Solvent banks can temporarily draw on BNB liquidity subject to haircuts on eligible collateral according to the BNB Law and Ordinance No. 6, though such loans may not exceed the limit fixed by the CBA. - Reserves are currently well in excess of this floor. - Other back-stop mechanisms include tools to take over a bank and sell it in line with the bank resolution framework. - Crisis experience: - Experience from the 1996/97 banking crisis and crisis preparedness tested in 2008 leave authorities well equipped to act swiftly. - Improvements to bank resolution and contingency planning frameworks will be pursued in the context of ongoing EU-level initiatives. ### Rebuilding reserves and fiscal financing - Role of the CBA: - The currency board arrangement (CBA) is the bridge to eventual euro adoption and a pillar of macroeconomic stability since the late 1990s. - International reserves and fiscal reserve: - High international reserves support the CBA and bolster ability to sustain shocks. - The fiscal reserve comprises one-fifth of total external reserves and played a critical role during the recent crisis. - Recent drawdown of the FRA to finance the fiscal deficit has reduced reserve coverage to below 180 (at end-April 2011) from 200 percent of reserve money (at end-January 2010). - Given external risks, the fiscal reserve should be preserved and rebuilt. - Financing options to rebuild reserves: - A Eurobond issue in 2011 would quickly rebuild fiscal reserves at reasonable cost; Eurobond repayments of about €1 billion in both 2013 and 2015 are upcoming obligations. - If market conditions prevent a Eurobond, authorities could increase domestic bond issuance as long as liquidity conditions are favorable. - Renewed privatization in 2011 would provide resources to replenish the fiscal reserve. - Debt management improvements recommended: consolidate existing issues, establish benchmark issues, and streamline primary dealership to enhance market liquidity. - Authorities’ planned strategy: - The authorities did not include a Eurobond issue in their 2011 fiscal financing strategy and plan to tap the Eurobond market in 2012, considering liquidity buffers adequate for 2011. ### Staff appraisal — macro and financial outlook, and policy priorities - Growth and risks: - Export-led recovery continues but faces headwinds from rising inflation and regional uncertainty. - Staff expects moderate real GDP growth in 2011, with risks tilted to the downside. - Real GDP is expected to recover to its pre-crisis levels by 2012 but reach its potential only in 2016 with more modest growth than before the crisis. - External vulnerabilities: - External debt burden remains significant and generates a relatively large re-financing need, including for the financial sector. - Linkages to the euro area periphery are a source of risk; tensions could cause faster deleveraging by periphery banks and erode confidence, potentially de-railing the recovery. - Reserve and fiscal priorities: - Preserving and rebuilding international and fiscal reserves will help bolster defenses against shocks. - The fiscal reserve should be preserved and quickly rebuilt through more proactive debt issuance and privatization. - Financial sector vigilance: - Despite resilience, continued close monitoring of banks and coordination with home supervisors and the Ministry of Finance is needed. - Deteriorated asset quality calls for continued vigilance: NPLs remain high and profits have declined amid weak credit demand. - Current profits, existing provisions, collateral, and capital appear adequate to absorb potential losses. - As recovery gathers pace, regulatory easing implemented in the crisis could be gradually reversed. - Structural reform priorities: - Sustained reforms are needed to jump-start job creation and income convergence. - NRP targets measures to reduce skills mismatch, especially in tradeables sectors. - Further reforms should replicate improvements across all levels of government and address judicial and governance shortcomings to enhance FDI attractiveness. - Fiscal framework: - Exit from the EDP and the proposed Financial Stability Pact reflect commitment to prudent fiscal policies. - Efforts should be made to meet the 2011 deficit target and resist spending pressures. - Over the medium term, a safety margin with respect to the new medium-term objective would address revenue underperformance risks. - Deeper reforms in health, public administration, and pensions are needed; complementing the Financial Pact with a rule linking fiscal policy to a prudent estimate of potential growth is recommended. *Source: IMF staff report excerpt (PDF content provided).* ### 46. It is proposed that the next Article IV consultation with Bulgaria will be held on ### _cr11179 - 46. It is proposed that the next Article IV consultation with Bulgaria will be held on ### Real sector developments - Post-crisis GDP remains well below potential; potential growth was halved during the crisis. - Bulgaria GDP (Billons of NC): charted 2000–2010 showing Real GDP and Potential GDP (no numeric series in text). - Recovery has been export-led; GDP components contributions (2008Q1–2010Q2): - Imports, Exports, Investment, Consumption, GDP growth (y/y). - Contributions to GDP growth, 2010 (selected NMS): BGR, CZE, EST, HUN, LVA, LTU, POL, ROM, SVK, SVN — contributions from Imports, Exports, Investment, Consumption (charted). - Industrial production and investment showing signs of improvement: indices (2005=100) and investor confidence (Percent, SA). - Consumption remains weak: retail sales (2005=100, SA) and consumer confidence (Percent, SA). - High unemployment: BGR Long-term Unemployment (Percent, NSA, RHS) and Unemployment (Percent, SA) compared with NMS. ### External sector developments - Capital flows before the crisis fueled demand: Domestic Demand (growth, 2003-08) and Capital Flows (percent of GDP, 2003-08); bubble size indicates current account deficit (CAD). - Capital inflows raised current account deficits and put pressure on the real exchange rate (RER) (RER appreciation, ULC, percent, 2003-08). - Bulgaria's current account adjusted swiftly during the crisis: Current Account Deficits (Percent of GDP), series 2007–2010. - FDI was high compared with CEE countries: Share of FDI on inflows (avg, 2003-08). - Exports increased market share (Exports, Share of world imports, 2000=100; series 2000–2010). - External debt is high, but largely comprising intra-company lending: External Debt (Percent of GDP) - composition: General government, Banks, Non-financial Private, Intra-company lending. ### Inflation and monetary developments - HICP inflation (y/y, in percent) and contributions (in pps): Food, alcohol, tobacco; Energy; Core; Total — series 2008M1–2010M9. - HICP inflation in region: BGR, EST, LVA, LIT, ROM, EA — series 2008M1–2011M1. - Credit remained flat in 2010 (index 2004=100): BGR vs EE average and Euro area. - Credit growth series for Jan-08 to Jan-11: Credit to corporations, households, mortgage; credit to economy overall. - Household interest rates on new deposits and loans (in percent), series 2009M1–2011M1: - Deposits, leva; Deposits, euro; Consumer loan, leva; Consumer loan, euro; Mortgage, leva; Mortgage, euro. - Lending rates fell, especially in leva, but deposits continued to grow (index 2004=100). - Inflation rose following increases in food and fuel prices. ### Labor market developments - Nominal wage growth and downturn unemployment increase (pps) across BGR, EST, LTU, LVA, POL, HUN, SVK, ROM, SVN, CZE. - Real wage growth broadly followed productivity growth (Real wage and productivity growth, 2007–10). - Recent productivity increases reflect reduced employment rather than structural reforms. - UE doubled during the downturn; change in unemployment (in pps) across countries (Boom vs Downturn). - Contributions to employment decline during downturn (in percent): Construction, Manufacturing, Services and Other, Retail Trade, Agriculture. - Downturn change in unemployment (in pps), long-term and youth unemployment increases noted; youth and long-term unemployment severely impacted. ### Fiscal developments - Expenditures, GDP, and CPI indexed (Index 2001 = 100): Investment, Other, Benefits, Compensation, HICP, Nominal GDP (series 2001–2010). - Overall Balance (Percent of GDP) series 2000–2016 showing past surpluses and need for adjustment after 2009 deterioration. - Net lending (Percent of GDP) with MTO comparisons (CP 2006-09, CP 2007-10, CP 2008-11, CP 2009-12) and Actual (rhs), series 2006–2012. - Public health and pension expenditures projections (Percent of GDP) and public health deficit and pension deficit projections through 2055. - Findings: - Buoyant revenues prior to the crisis induced spending, particularly on wages and benefits. - Despite history of surpluses, fiscal deficit needs to adjust to the medium-term objective after 2009 deterioration. - Reforms are needed to prevent unsustainable deficits from pension and health outlays. - The FRA needs to be rebuilt to provide a buffer against potential shocks. ### General government operations (Tables 5a and 5b, 2008–16) - Statement of Operations (In millions of leva), selected rows: - Revenue: 26,359 (2008); 24,087 (2009); 23,053 (2010); 24,680 (2011); 27,027 (2012); 29,217 (2013); 30,578 (2014); 32,404 (2015); 34,344 (2016). - Taxes: 16,774 (2008); 14,898 (2009); 14,044 (2010); 15,093 (2011); 15,970 (2012); 16,908 (2013); 17,860 (2014); 18,884 (2015); 19,968 (2016). - Social contributions: 4,438 (2008); 4,321 (2009); 4,091 (2010); 4,528 (2011); 4,791 (2012); 5,033 (2013); 5,289 (2014); 5,558 (2015); 5,841 (2016). - Grants: 1,142 (2008); 1,326 (2009); 1,603 (2010); 1,917 (2011); 3,270 (2012); 4,181 (2013); 4,281 (2014); 4,608 (2015); 4,959 (2016). - Other revenue: 4,005 (2008); 3,543 (2009); 3,315 (2010); 3,141 (2011); 2,997 (2012); 3,095 (2013); 3,147 (2014); 3,355 (2015); 3,576 (2016). - Expenditure: 24,369 (2008); 24,714 (2009); 25,834 (2010); 26,538 (2011); 28,589 (2012); 30,303 (2013); 31,456 (2014); 33,233 (2015); 34,930 (2016). - Expense: 19,854 (2008); 20,926 (2009); 21,573 (2010); 22,580 (2011); 24,054 (2012); 25,409 (2013); 26,154 (2014); 27,507 (2015); 28,961 (2016). - Compensation of employees: 3,836 (2008); 4,103 (2009); 4,146 (2010); 4,146 (2011); 4,023 (2012); 4,184 (2013); 4,445 (2014); 4,691 (2015); 4,950 (2016). - Social benefits: 8,594 (2008); 9,955 (2009); 10,583 (2010); 10,940 (2011); 11,154 (2012); 11,776 (2013); 12,497 (2014); 13,327 (2015); 14,232 (2016). - Pensions: 5,546 (2008); 6,439 (2009); 6,971 (2010); 7,021 (2011); 7,234 (2012); 7,605 (2013); 7,980 (2014); 8,372 (2015); 8,781 (2016). - Net lending/borrowing (on cash basis): 1,990 (2008 surplus) ; -627 (2009); -2,781 (2010); -1,858 (2011); -1,562 (2012); -1,086 (2013); -878 (2014); -829 (2015); -586 (2016). - Primary balance: 2,575 (2008); -106 (2009); -2,295 (2010); -1,274 (2011); -837 (2012); -170 (2013); -65 (2014); -162 (2015); 27 (2016). - Memorandum items: - Net financial worth: 7,667 (2008); 4,536 (2009); 2,788 (2010); 1,446 (2011). - Fiscal reserve account: 8,382 (2008); 7,673 (2009); 6,012 (2010); 4,827 (2011). - Gross debt: 10,710 (2008); 10,641 (2009); 12,240 (2010); 13,249 (2011); 16,609 (2012); 18,032 (2013); 18,803 (2014); 20,138 (2015); 22,018 (2016). - Foreign component of gross debt: 7,637 (2008); 7,631 (2009); 8,156 (2010); 8,696 (2011); 11,226 (2012); 11,714 (2013); 12,004 (2014); 12,522 (2015); 13,052 (2016). - Domestic component of gross debt: 3,073 (2008); 3,009 (2009); 4,084 (2010); 4,553 (2011); 5,383 (2012); 6,318 (2013); 6,799 (2014); 7,616 (2015); 8,965 (2016). - Table 5b (In percent of GDP), selected ratios: - Revenue: 38.0 (2008); 35.3 (2009); 32.7 (2010); 32.7 (2011); 33.5 (2012); 34.1 (2013); 33.6 (2014); 33.4 (2015); 33.2 (2016). - Expenditure: 35.2 (2008); 36.2 (2009); 36.7 (2010); 35.2 (2011); 35.4 (2012); 35.4 (2013); 34.5 (2014); 34.3 (2015); 33.8 (2016). - Net lending/borrowing: 2.9 (2008); -0.9 (2009); -3.9 (2010); -2.5 (2011); -1.9 (2012); -1.3 (2013); -1.0 (2014); -0.9 (2015); -0.6 (2016). - Primary balance: 3.7 (2008); -0.2 (2009); -3.3 (2010); -1.7 (2011); -1.0 (2012); -0.2 (2013); -0.1 (2014); 0.0 (2015); 0.2 (2016). - Gross debt (percent of GDP): 15.5 (2008); 15.6 (2009); 17.4 (2010); 17.5 (2011); 20.6 (2012); 21.0 (2013); 20.6 (2014); 20.8 (2015); 21.3 (2016). - Notes on contingency reserve in 2010: - BGN 527 mln in arrears repayment; 218 mln for road infrastructure; 45 mln for railway infrastructure; 116 mln for subsidies (mostly agriculture); 142 mln for social security; and 81 mln for natural disasters. ### Financial stability indicators and banking sector - Overview (Emerging Europe, 2008–2010): - Non-performing loans (in percent of total loans) rose: NPLs across countries show increases 2008, 2009, 2010 (BGR values in chart). - Provisions (in percent of NPLs) remain above the regional average across 2008–2010. - Return on assets declined markedly: Return on assets (in percent) 2008–2010 shows fall to around 0.9–1.1 percent. - Return on equity remains positive and above comparator countries (Return on equity in percent, 2008–2010). - Capital adequacy ratio increased (in percent) 2008–2010. - Liquidity has risen but lags behind comparators: Liquid assets to short-term liabilities (in percent) increased 2008–2010 but low relative to peers. - Financial Soundness Indicators, Bulgaria (2008–2011) — selected indicators (Dec 2008; Mar 2009; Jun 2009; Sep 2009; Dec 2009; March 2010; 2010; 2011 as provided): - Capital to risk-weighted assets: 14.9; 17.0; 18.3; 18.0; 17.8; 17.5; 17.7. - Tier 1 capital to risk-weighted assets: 11.2; 14.0; 15.2; 15.2; 15.3; 15.2; 15.4. - Nonperforming loans to total gross loans: 2.5; 6.4; 7.8; 9.5; 10.6; 11.9; 12.9. - Nonperforming loans net of provisions to capital: 4.3; 15.1; 18.3; 22.4; 24.8; 28.1; 30.8. - Return on assets: 2.1; 1.1; 1.0; 1.0; 0.9; 0.9; 0.9. - Return on equity 1/: 23.1; 10.2; 8.8; 9.1; 8.2; 7.9; 8.0. - Liquid assets to total assets: 19.1; 18.8; 19.1; 19.0; 19.0; 20.9; 20.9. - Liquid assets to short-term liabilities: 26.6; 26.6; 26.8; 26.8; 26.9; 30.1; 30.6. - Capital to assets (Tier I based): 8.5; 10.8; 11.0; 10.9; 10.7; 10.5; 10.6. - Customer deposits to total (non-interbank) loans: 84.8; 83.0; 85.6; 86.1; 85.5; 87.8; 90.3. - Foreign currency denominated loans to total loans: 56.9; 58.6; 59.5; 60.1; 60.9; 61.3; 61.6. - Foreign currency denominated liabilities to total liabilities: 60.0; 64.4; 63.0; 62.1; 60.8; 58.6; 57.6. ### Growth projections (Table 3: Real GDP components, 2008–16) - Real GDP (annual rates and contributions): - Real GDP: 6.2 (2008); -5.5 (2009); 0.2 (2010); 3.0 (2011); 3.5 (2012); 3.7 (2013); 3.8 (2014); 3.9 (2015); 4.0 (2016). - Domestic demand and components (selected series): - Domestic demand: 6.4 (2008); -12.7 (2009); -4.5 (2010); 1.1 (2011); 3.3 (2012); 3.6 (2013); 3.7 (2014); 3.9 (2015); 4.0 (2016). - Private demand: 7.5 (2008); -13.2 (2009); -4.4 (2010); 0.5 (2011); 2.4 (2012); 3.7 (2013); 4.0 (2014); 4.1 (2015); 4.5 (2016). - Public demand: 1.2 (2008); -10.2 (2009); -5.0 (2010); 3.9 (2011); 7.8 (2012); 2.8 (2013); 2.0 (2014); 3.2 (2015); 1.9 (2016). - Investment: 16.3 (2008); -24.9 (2009); -14.0 (2010); 2.7 (2011); 9.0 (2012); 7.8 (2013); 6.7 (2014); 7.0 (2015); 7.4 (2016). - Exports of goods and services: 3.0 (2008); -11.2 (2009); 16.2 (2010); 9.1 (2011); 5.4 (2012); 4.8 (2013); 3.0 (2014); 4.4 (2015); 5.2 (2016). - Imports of goods and services: 4.2 (2008); -21.0 (2009); 4.5 (2010); 7.0 (2011); 5.0 (2012); 4.5 (2013); 2.9 (2014); 4.4 (2015); 5.1 (2016). - Contributions to real GDP growth (in percent) provided in Table 3. *Source: IMF staff estimates and source tables in the provided document.* ### APPENDIX I. EXTERNAL AND PUBLIC DEBT SUSTAINABILITY ANALYSES ### APPENDIX I. EXTERNAL AND PUBLIC DEBT SUSTAINABILITY ANALYSES ### External debt trends and composition - Private external debt increased from about 20 percent of GDP in 2003 to more than 90 percent of GDP as of end-2010. - Public sector external debt fell from 35 percent of GDP in 2003 to 8 percent of GDP in 2010. - As of end-2010, public debt represented less than 8 percent of total external debt. - External debt peaked in 2009 at 108 percent of GDP. - External debt declined to 93½ percent of GDP at end-March (post-crisis adjustment). - About 40 percent of external debt is intra-company lending, which reduces rollover risks. - Rollover rates for intra-company lending during 2008–10 averaged 170 percent. ### Medium-term projections and scenarios for external debt - Baseline projection: external debt is projected to fall to less than 70 percent of GDP by 2016. - Historical scenario: external debt may fall to about 60 percent of GDP by 2016 (deleveraging faster than baseline due to stronger historical growth assumptions). - Combined persistent shocks (permanent 1/4 standard deviation to interest rate, growth rate, and current account deficit) would raise the external debt trajectory to 83 percent of GDP by 2016, which still implies significant deleveraging relative to the 2009 peak. ### Shocks and sensitivity for external debt (figure summaries) - Individual permanent one-half standard deviation shocks are analyzed (shaded areas represent actual data in the figures). - Specific scenario outcomes summarized in figures: - Interest rate shock: baseline 67 (percent of GDP) vs. i-rate shock 69. - Historical scenario: 61 (percent of GDP). - Current account (CA) shock: baseline 67 vs. CA shock 89. - Combined shock (real interest, growth, CA) outcome: 83 (percent of GDP). - Real depreciation shock (one-time 30 percent real depreciation in 2012): baseline 67 vs. 100 (percent of GDP) under shock. - Growth and other variable box values shown in figures: - Baseline growth: 2.3; Scenario: 2.8; Historical: 3.2. - Baseline (other box): 3.9; Scenario: 1.9; Historical: 4.1. - Baseline (current account): -0.6; Scenario: -5.3; Historical: -9.1. - Permanent 1/4 standard deviation shocks were applied to the real interest rate, growth rate, and current account balance in combined-shock analyses. ### Public debt levels and vulnerability - Gross public sector debt remained below 20 percent of GDP in the baseline, described as low by international standards. - Table 2 (Public Sector Debt Sustainability Framework, 2008–16) headline values: - Public sector debt (actual/projections): 15.5 (2008), 15.6 (2009), 17.4 (2010), 17.5 (2011), 20.6 (2012), 21.0 (2013), 20.6 (2014), 20.8 (2015), 21.3 (2016). - Of which foreign-currency denominated: 11.0 (2008), 11.2 (2009), 11.6 (2010), 11.5 (2011), 13.9 (2012), 13.7 (2013), 13.2 (2014), 12.9 (2015), 12.6 (2016). - Change in public sector debt: -3.1 (2008), 0.1 (2009), 1.8 (2010), 0.2 (2011), 3.0 (2012), 0.5 (2013), -0.4 (2014), 0.1 (2015), 0.5 (2016). - Primary deficit: -3.7 (2008), 0.2 (2009), 3.3 (2010), 1.7 (2011), 1.0 (2012), 0.2 (2013), 0.1 (2014), 0.0 (2015), -0.2 (2016). - Revenue and grants (percent of GDP): 38.0 (2008), 35.3 (2009), 32.7 (2010), 32.7 (2011), 33.5 (2012), 34.1 (2013), 33.6 (2014), 33.4 (2015), 33.2 (2016). - Primary (noninterest) expenditure (percent of GDP): 34.3 (2008), 35.4 (2009), 36.0 (2010), 34.4 (2011), 34.5 (2012), 34.3 (2013), 33.6 (2014), 33.4 (2015), 33.0 (2016). - Automatic debt dynamics: -2.4 (2008), 0.2 (2009), 0.2 (2010), -0.2 (2011), -0.3 (2012), -0.2 (2013), -0.6 (2014), -0.4 (2015), -0.5 (2016). - Other identified debt-creating flows: 1.3 (2008), 1.9 (2009), 1.7 (2010), 0.9 (2011), 1.1 (2012), 1.1 (2013), 1.1 (2014), 1.0 (2015), 0.0 (2016). - Residual, including asset changes: 4.3 (2008), 1.7 (2009), 0.0 (2010), -0.4 (2011), 3.4 (2012), 1.6 (2013), 1.2 (2014), 1.5 (2015), 1.2 (2016). - Public sector debt-to-revenue ratio: 40.6 (2008), 44.2 (2009), 53.1 (2010), 53.7 (2011), 61.5 (2012), 61.7 (2013), 61.5 (2014), 62.1 (2015), 64.1 (2016). - Scenario outcomes for public debt: - Scenario with key variables at their historical averages produces debt trajectories (selected values): 17.6, 12.5, 10.8, 7.5, 4.4, 1.7, -0.2, 0.0 (years unspecified in excerpt). - Scenario with no policy change (constant primary balance) in 2010–2016 yields debt path values: 17.6, 19.5, 24.2, 27.5, 30.1, 33.3, 36.9 (years unspecified); debt-stabilizing primary balance under no policy change: -0.9. - Stress-test results in public debt bound tests (figure summaries): - Growth shock, primary balance shock (PB shock), interest rate shock, and combined shocks are analyzed; example box values: - Growth shock: baseline 21 vs. growth shock 36 (percent of GDP) in one panel. - PB shock: baseline 21 vs. PB shock 25 in one panel; no policy change scenario box values: Baseline:-0.6; Scenario:-1.4; Historical:2.9. - Interest rate shock: baseline 21 vs. i-rate shock 22. - Combined real depreciation and contingent liabilities shocks (one-time 30 percent real depreciation and 10 percent of GDP contingent liabilities shock in 2010) produce higher debt paths (example panel values: combined shock 25 vs. baseline 21; real depreciation and contingent liabilities shock 27 vs. baseline 21). ### Key macroeconomic and fiscal assumptions underlying the baseline - Real GDP growth (in percent): 6.0 (2008), -5.0 (2009), 0.0 (2010), 2.0 (2011), 4.0 (2012), 4.0 (2013), 5.0 (2014), 3.9 (2015), 4.0 (2016). - Average nominal interest rate on public debt (in percent): 5.2 (2008), 4.9 (2009), 4.6 (2010), 4.7 (2011), 5.4 (2012), 5.6 (2013), 4.6 (2014), 4.4 (2015), 4.1 (2016). - Average real interest rate (nominal rate minus change in GDP deflator, in percent): -3.2 (2008), 0.6 (2009), 1.6 (2010), 0.7 (2011), 2.0 (2012), 3.3 (2013), 2.2 (2014), 1.9 (2015), 1.6 (2016). - Inflation rate (GDP deflator, in percent): 8.4 (2008), 4.3 (2009), 3.0 (2010), 4.0 (2011), 3.4 (2012), 2.3 (2013), 2.4 (2014), 2.5 (2015), 2.5 (2016). - Growth of real primary spending (deflated by GDP deflator, in percent): 7.6 (2008), -2.5 (2009), 1.7 (2010), -1.6 (2011), 3.9 (2012), 3.1 (2013), 1.8 (2014), 3.2 (2015), 2.7 (2016). - Nominal appreciation (increase in US dollar value of local currency, in percent): 7.0 (2008), 5.7 (2009) (further years not shown in excerpt). ### Analysis and policy-relevant findings - Deleveraging has begun following the global crisis: external debt fell from 108 percent of GDP in 2009 to 93½ percent of GDP by end-March, and medium-term projections show continued decline under baseline and historical scenarios. - The composition of external debt—with about 40 percent intra-company lending—mitigates rollover risk, supported by high observed rollover rates (170 percent average for 2008–10). - External debt remains sensitive to adverse real and financial shocks; however, even under combined permanent 1/4 standard deviation shocks the external debt ratio is projected to fall to 83 percent of GDP by 2016, indicating an anchored deleveraging process. - Public debt is low (gross debt below 20 percent of GDP) and remains manageable in baseline and stress scenarios; under shocks the debt ratio could increase significantly but remains below 40 percent of GDP in all scenarios considered. - Noted risks: unaccounted contingent liabilities and worse-than-assumed downside scenarios could raise public debt vulnerabilities. ### Policy implications and recommendations (as reflected in analysis) - Maintain prudent fiscal policies to preserve low public indebtedness and support the currency board arrangement. - Monitor and manage contingent liabilities to contain upside risks to public debt. - Continue efforts to support deleveraging through policies that sustain current account adjustment and growth, noting that conservative growth assumptions slow baseline deleveraging relative to historical trajectories. - Preserve financial stability and maintain capital buffers, given private-sector external indebtedness and potential shock transmission. *Source: APPENDIX I. EXTERNAL AND PUBLIC DEBT SUSTAINABILITY ANALYSES (IMF Staff Report excerpt).* ### 6. The Country Partnership Strategy (CPS) for Bulgaria ### 6. The Country Partnership Strategy (CPS) for Bulgaria ### CPS objectives and pillars - The Country Partnership Strategy (CPS) for Bulgaria, discussed by the Bank’s Board on May 17, 2011, is anchored in Bulgaria’s National Reform Program to implement the Europe 2020 Strategy and focused on three main pillars: - (i) policy reforms for National Reform Program to implement Europe 2020 Strategy, - (ii) strategies and institutions to accelerate EU funds absorption, - (iii) complementing EU financing. ### Active World Bank portfolio and historical lending - The current active Bank portfolio in Bulgaria consists of 4 operations at the total amount of US$ 353 equivalent. - The World Bank’s lending program in Bulgaria to date comprises 46 IBRD operations with a total original commitment of US$3,003 million equivalent, consisting of: - 15 adjustment loans (US$1,725.8 million), - 24 investment projects (US$1123 million), - one debt reduction loan (US$125 million), - four Bank-managed Global Environmental Fund (GEF) grants, - two Bank-managed Prototype Carbon Fund (PCF) operations. - Of these 46 operations: - 42 have been completed, - 13 have been fully or partially cancelled during implementation, - 4 operations are currently under implementation. - Active operations (net of cancellations) listed with operation name, amount, and Board date: - Second Trade and Transport Facilitation in Southeast Europe (TTFSE 2) — 52.8 — 2007 - Road Infrastructure Rehabilitation Project — 122.5 — 2007 - Social Inclusion Project — 59.0 — 2008 - Municipal Infrastructure Development Project — 118.7 — 2009 ### Economic and Sector Work (ESW) - Recent country diagnostic work completed by the Bank includes assessments and topical studies on: - the quality of education in Bulgaria and review of Bulgaria’s school autonomy reform, - long-term care policies for older populations, - better regulation topical studies on: - (i) administrative and regulatory barriers to business, - (ii) ex-post impact assessment of the Act on Limiting Administrative Regulation and Administrative Control on Economic Activity, - (iii) reforming the regime of state fees. ### IFC activities in Bulgaria - As of April 30, 2011, IFC has 30 projects (completed and ongoing) in Bulgaria with total commitments of over US$ 660 million. - Notable IFC involvements: - Largest IFC investment in the country: loan for construction of the largest wind park in Bulgaria (renewable energy). - Development involvement in the Galata gas field near the Black sea cost. - Support for a company investing in agricultural land and promoting land consolidation. - Support for two specialized SME banks; establishment of Bulgaria’s first micro-lending bank; investment in a venture fund targeting the SME sector. - Manufacturing sector support: modernization/expansion of an electronics producer, a large steel mill, and two glass processing plants. - Environmental components: one manufacturing plant purchasing equipment to reduce GHG emissions; electronics company producing sensors that monitor polluting gas emissions and improve fuel efficiency. ### Statistical issues — overview - Data provision is generally adequate for surveillance purposes. - Bulgaria participates in the SDDS since 2003. ### Real sector statistics - National Statistical Institute (NSI) responsibilities and methods: - Compiles national accounts based on SNA 1993 and European System of Accounts 1995. - GDP data by activity and expenditure compiled and reconciled within an annual supply and use framework. - Government output and final consumption are estimated on a cash basis. - Published national accounts include current and capital accounts for five main domestic sectors: general government and its sub-sectors, financial corporations, nonfinancial corporations, nonprofit institutions serving households, and households. - Financial accounts and balance sheets by institutional sectors and sub-sectors are compiled on annual basis since 2006. - Quarterly financial accounts and balance sheets are prepared by Bulgarian National Bank. - Quarterly GDP estimates: - NSI has compiled estimates of quarterly GDP by production and expenditure approaches in current and constant prices since 1994. - Preliminary flash estimates of GDP and components are produced and disseminated 45 days after the reference period. - Quarterly updates are disseminated 70 days after the end of the reference quarter with final figures disseminated after approximately 5 quarters. - Annual data are disseminated about 5 quarters after the end of the reference year. - Estimates at constant prices use chain-linked indices. - Remaining problems: coverage of private sector activities; constant price estimates of capital formation and external trade, although progress on export and import deflators. - Price indices: - NSI produces a domestic consumer price index (CPI), a harmonized consumer price index (HICP) (Eurostat methods), and a producer price index (PPI); all updated monthly. - CPI series begins in 1995, PPI in 2000, HCPI in 2005 (for earlier years it is set equal to the CPI). - CPIs exclude some sectors, mainly owner-occupied housing and health and life insurance; since 2004, financial services included. - Work has started on inclusion of owner-occupied housing in CPI within a Eurostat project. - Geographical coverage restricted to 27 urban areas that account for an estimated 65 percent of sales. - External trade and customs data: - Flow of customs data has improved significantly and a new system for processing customs records is near completion. - Development of export and import unit value indices is progressing; additional support expected from Eurostat. - Current indices are used as deflators for import and export components of national accounts. - Import and Export Division of the NSI meets monthly with the BNB to review data issues and ensure consistency with balance of payments data. - Employment and wages: - National account data on employment and hours worked compiled by NSI based on Labor Force Survey and adjusted per ESA’95. - NSI obtains monthly estimates from a quarterly survey of establishments covering all public enterprises and a sample of private employers excluding establishments with less than five employees. - Sample included 14,500 private employers out of approximately 142,000 qualifying private enterprises. - Household labor force survey is alternative source; survey conducted four times a year; improvements needed for consistency with establishment survey, especially regarding agricultural employment. - NSI compiles and publishes wage data for various sectors; main shortcomings: - (i) under-reporting of private sector wages; - (ii) reporting of average gross earnings only, not wages for time worked and wages by occupation. - Since 2002, every four years a survey on earnings provides information about average monthly and hourly earnings by activity, occupation, gender and education. - National Social Security Institute (NSSI) administrative data used to estimate wages by occupation and age, number of self-employed and employment in small firms. - Household budget survey could provide alternative source for private sector wages. - Population census: - A Population Census was conducted in early 2001 and used for redesigning household surveys (household budget survey and labor force survey). ### Government finance statistics - Progress and practices: - Following recommendations of a combined STA/FAD mission and within fiscal reporting requirements for EU accession, authorities have made significant progress implementing accrual accounting for government, budgetary and statistical systems. - Consolidated data on a cash basis covering general and central government operations are routinely reported for publication in the GFS Yearbook/Annual CD-ROM and in IFS. - Quarterly accrual GFS data are reported on a quarterly basis for publication in IFS through Eurostat. - Since September 2008, the Ministry of Finance (MOF) prepares and submits the SDDS indicators for the central government finances in the IMF’s GFSM 2001 format. - The same indicators are published on the MOF’s website on a monthly and quarterly basis. - Ministry of Finance prepares data on execution of the consolidated government budget on a monthly basis following the national presentation; these data are not according to GFS standards. - Aggregate data on revenue, expenditure, balance of the general government and composition of the financing (in national formats) are published in the monthly bulletin and posted on the MOF’s website, in addition to the GFSM 2001 data. - Authorities have made progress in presenting data on a disaggregated basis, including expenditure by functional classification. - A full economic classification of expenditure is now available, with such data provided on an annual basis back to 1998. ### Money and banking statistics - BNB reports monetary data for publication in IFS based on the ECB framework for the collection and compilation of monetary data. *International Bank for Reconstruction And Development and International Finance Corporation Country Partnership Strategy for Bulgaria for the period 2011-2013, April 20, 2011.* ### 11. Bulgaria provides quarterly balance of payments (BOP) statistics for dissemination in ### 11. Bulgaria provides quarterly balance of payments (BOP) statistics for dissemination in ### Balance of payments and data compilation - Bulgaria provides quarterly balance of payments (BOP) statistics for dissemination in the IFS on a timely basis. - Yearly BOP data are disseminated in the Balance of Payments Statistics Yearbook up to 2009. - The BNB derives other sectors investment income data on reinvested earnings, (debit) from the annual direct investment surveys of the NSI, and through surveys of the largest foreign-owned enterprises for preliminary estimates. - Starting from 2002, data series on freight were revised according to a new methodology introduced jointly by the BNB and the NSI. - Since joining the EU in January 2007, trade data with EU countries are collected following the INTRASTAT system. - Data collection for imports and exports with non-EU member states and the movement of goods within the EU remain recorded through customs declaration. ### Data dissemination timetable and data-quality assessments (selected) - Exchange Rates: May 2011; received 05/19/2011; Frequency: M (monthly); Publication: M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: April 2011; received 05/20/2011; Frequency: M; Publication: M - Reserve/Base Money: March 2011; received 04/27/2011; Frequency: M; Publication: M - Broad Money: March 2011; received 04/27/2011; Frequency: M; Publication: M - Consumer Price Index: April 2011; received 05/12/2011; Frequency: M; Publication: M - External Current Account Balance: 2010 Q4; received 04/12/2011; Frequency: Q; Publication: Q - GDP: 2011 Q1 (flash estimate); received 05/13/2011; Frequency: Q; Publication: Q - Footnote summary: “O” = fully observed; “LO” = largely observed; “LNO” = largely not observed; “NO” = not observed. Data-quality assessments reflect the 2003 ROSC mission findings and related categories for methodological soundness and accuracy and reliability. ### Recent macroeconomic developments and outlook - Recovery and growth: - After contracting 5.5 percent in 2009, the economy stabilized in 2010 growing 0.2 percent, led by strong export growth. - Q1 GDP growth reached 3.4 percent year-on-year (0.6 percent quarter-on-quarter). - Real GDP is projected to rise to 3 percent in 2011 and recover to its pre-crisis levels in 2012. - Over the medium term, growth is expected to recover to about 4 percent. - External sector and trade: - Current account deficit reduced from 23 to 1 percent of GDP between 2008 and 2010. - Since February 2011 the current account (12-month moving basis) turned positive; current account showed a surplus of 0.6 percent of GDP for January-April 2011 versus a deficit of 2 percent of GDP for January-April 2010. - Foreign direct investment decreased, mainly due to net payments on intercompany credits. - Inflation and prices: - Core inflation averaged one percent in 2010; headline inflation averaged 3 percent in 2010. - HICP inflation decelerated to 3.4 percent in May 2011. - Pressures from rising energy and food prices expected to ease in latter half of 2011; staff projects average HICP inflation of 4¼ percent in 2011 and 3.1 percent in 2012 (Table shows 4.2 for 2011, 3.1 for 2012 under "Consumer price index (HICP, average)"). - A “gentlemen’s agreement” with “Lukoil Bulgaria” led to a 2.6 percent monthly decline in retail fuel prices in May 2011. - Labor market and competitiveness: - Unemployment rate: 10.3 percent in 2010; projected 9.7 percent in 2011 and 9.0 percent in 2012 (Table). - Labor productivity has increased, following rise in unemployment and moderation in wage growth. - Nominal wages: 6.0 percent in 2010; projected 6.0 percent in 2011 and 5.9 percent in 2012 (Table). - Financial sector: - Non-performing loans rose to 12.9 percent by end-March 2011. - Capital adequacy ratio remained high at 17.7 percent. - Banking system remained profitable and well-capitalized; authorities eased regulatory requirements during crisis to permit use of capital and provisioning buffers. ### Fiscal position and policy stance - Fiscal outcomes and strategy: - Fiscal deficit (cash-basis) was 3.9 percent in 2010. - Authorities’ 2011 deficit target: 2.5 percent of GDP (ESA 95 methodology). - Performance suggests the 2011 deficit target will be met; authorities committed to additional measures if external environment or revenue performance deteriorates. - Fiscal reserve was used as a liquidity buffer during the crisis; coverage of imports above 6.5 months. - Authorities plan to rebuild the fiscal reserve over time and do not consider substantial debt issuance in 2011. - Fiscal aggregates (Table: General government, percent of GDP): - Revenue: 32.7 percent in 2010; projected 32.7 percent in 2011 and 33.5 percent in 2012. - Expenditure: 36.7 percent in 2010; projected 35.2 percent in 2011 and 35.4 percent in 2012. - Net lending/borrowing: -3.9 percent in 2010; projected -2.5 percent in 2011 and -1.9 percent in 2012. - Gross debt (excluding guarantees): 16.2 percent in 2010; projected 16.6 percent in 2011 and 19.3 percent in 2012. - Privatization proceeds: 0.1 percent in 2010; projected 0.6 percent in 2011 and 0.2 percent in 2012. - External financing: 0.2 percent in 2010; projected 0.6 percent in 2011 and 3.0 percent in 2012. - Domestic financing: 3.7 percent in 2010; projected 2.6 percent in 2011 and 0.8 percent in 2012. - Policy measures: - Tax policies broadly unchanged to provide stability for businesses. - Restructuring of tax and customs administration to improve collection and reduce fraud and evasion. - Expenditure-side strategy: continued real contraction of spending, tight ceilings, wage and pension bill freezes. - Long-term strategy includes reforms in health, public administration, and pensions to free policy space and address aging-related pressures. ### Executive Board assessment and policy recommendations - Commendations and overall view: - Directors commended sound policies that helped Bulgaria weather the global crisis and enabled export-led recovery. - The challenge is to rebuild policy buffers and speed up reforms to boost resilience and medium-term growth. - Fiscal policy recommendations: - Welcome of the authorities’ 2011 deficit target and emphasis on strengthening tax compliance and resisting spending pressures ahead of elections. - Importance of improving quality and durability of fiscal consolidation; support for the proposed Financial Stability Pact and a complementary fiscal rule to avoid pro-cyclicality. - Some Directors encouraged more ambitious medium-term fiscal goals to reconstitute buffers. - Financial sector recommendations: - Continue vigilance given relatively high non-performing loans and reliance on support from parent institutions abroad. - Develop contingency plans and back-stop arrangements given linkages with fiscally distressed euro-area economies; coordinate monitoring with home supervisors. - Reverse easing of prudential regulations implemented during the crisis and strengthen corporate debt resolution framework. - Structural reform recommendations: - Step up structural reforms to improve growth prospects. - Align wage growth better with productivity to safeguard competitiveness. - Continue initiatives to reduce skills mismatch, decrease administrative burdens, strengthen legal system, and improve absorption of EU funds. ### Key summary indicators (selected from Table: Bulgaria: Selected Economic and Social Indicators, 2008–12) - Output and prices: - Real GDP: 6.2 (2008); -5.5 (2009); 0.2 (2010); 3.0 (2011, proj.); 3.5 (2012, proj.) - Real domestic demand: 6.4 (2008); -12.7 (2009); -4.5 (2010); 1.1 (2011, proj.); 3.3 (2012, proj.) - Consumer price index (HICP, average): 12.0 (2008); 2.5 (2009); 3.0 (2010); 4.2 (2011, proj.); 3.1 (2012, proj.) - Unemployment rate: 5.7 (2008); 6.9 (2009); 10.3 (2010); 9.7 (2011, proj.); 9.0 (2012, proj.) - Fiscal and financial: - Net lending/borrowing (general government, percent of GDP): 2.9 (2008); -0.9 (2009); -3.9 (2010); -2.5 (2011, proj.); -1.9 (2012, proj.) - Gross debt (excluding guarantees): 13.7 (2008); 14.6 (2009); 16.2 (2010); 16.6 (2011, proj.); 19.3 (2012, proj.) - Broad money (M3): 8.8 (2008); 4.2 (2009); 6.4 (2010); 9.5 (2011, proj.); 8.9 (2012, proj.) - External sector: - Current account balance (percent of GDP): -23.0 (2008); -8.9 (2009); -1.0 (2010); -0.6 (2011, proj.); -1.0 (2012, proj.) - Gross official reserves: 35.9 (2008); 37.0 (2009); 36.0 (2010); 35.3 (2011, proj.); 37.2 (2012, proj.) - Gross external debt: 104.9 (2008); 108.0 (2009); 101.8 (2010); 94.2 (2011, proj.); 90.6 (2012, proj.) - Exchange rate regime: - Currency board peg to euro at lev 1.95583 per euro. - Selected social indicators: - Per capita GNI (Atlas method, 2009): US $6060 - Poverty rate (2008): 21.8 percent - Life expectancy at birth (2008): 73.3 years - Mortality under 5 (per 1,000) (2009): 10 - Fertility rate per woman (2008): 1.478 - Income distribution (Gini index, 2008): 33.5 - Primary education completion rate (2008): 89.9 *Source: IMF staff report and Public Information Notice, Article IV consultation with Bulgaria, June 29, 2011.* ### introduction of the Financial Stability Pact. The government submitted a draft for ### introduction of the Financial Stability Pact. The government submitted a draft for ### Financial Stability Pact — draft provisions and next steps - The government submitted a draft for constitutional and legislative amendments to Parliament. - The current version of the Pact envisages: - a deficit ceiling set tighter than that of the EU Stability and Growth Pact; - an upper limit of expenditures to 40 percent of GDP; - changes in direct taxes subject to a constitutional majority vote. - Although not included in the current version of the Pact, the alternative fiscal rules proposed by the Fund are being carefully analyzed in the Ministry of Finance and may be incorporated during the next round of discussions in September 2011. ### Monetary and macro-prudential policies; financial sector soundness - The CBA has proved its flexibility and sustainability both during the boom prior to the crisis and in the cyclical downturn, and it has continuous support from macro-prudential policies. - Recent macro-prudential measure: - The BNB increased from 6 to 12 months the term for realization of collateral provided in the form of buildings or land. - Intended anti-cyclical effect given current liquidity conditions in the real estate market and the need to preserve flexible relations with bank customers facing temporary liquidity problems. - Balances alleviating banks’ capital positions with preserving capital buffers; preserves conservative supervisory policy. - Financial system indicators and monitoring: - By the end of Q1 2011, the banking system’s capital adequacy ratio was 17.7 percent, with Tier 1 at 15.4 percent. - As of 30 April 2011, the liquid asset ratio was 23.7 percent. - The overnight money market interest rate is currently below 0.20 percent. - Supervisory stance and funding structure: - Strong and persistent risk-aversion of supervisory authorities has led to a more diversified funding structure with less reliance on foreign funding in the post-crisis period. - Deposits of households have continued to increase. - Increased monitoring: intensified contacts with bank management and home country supervisors and increased frequency of reporting. - Asset quality, profitability, and lending developments: - Recent developments suggest stabilization of asset quality. - Rates of increase in impairment costs and specific provisions for credit risk were similar in April to those registered in January. - Operating revenue has exceeded operating expenses and impairment costs during the downturn; the majority of banks remain profitable. - Restructuring among small banks has progressed well and they have resumed credit growth. - Corporate lending recorded a 0.8 percent monthly increase in April — the biggest monthly increase since the beginning of the year. - Lending to households remained largely flat. - The market share of small and medium-sized banks has continued to increase steadily. ### Structural reforms — pensions, health, education, railroads, and EU funds absorption - Pensions: - Based on Fund TA recommendations (late 2010), authorities implemented a package ensuring long-term financial stability and better adequacy of pensions. - Social contribution rate was raised by 1.8 pp as an immediate step following a decade of decreasing rates. - The length of service is increased as of 2012, followed by a gradual increase in the statutory retirement age. - These measures, together with labor market structural reforms, aim at a steady increase in economic activity and neutralizing the burden of an ageing population without jeopardizing public finance stability. - Health care: - Reform targets higher efficiency of health care expenditures, improved public health, higher national health security, and stabilizing healthcare system infrastructure. - Starting from 2011, an integrated information system is developed to link in real time the information systems of healthcare institutions and their contractors. - The system will connect existing systems of several institutions with healthcare service providers and guarantee timely and accurate exchange of information among all participants to support regular assessment of the health insurance system, monitoring and optimal decision making. - Work to develop electronic registers, electronic prescriptions, and electronic referrals will continue; existing registers will be integrated into a unified information system with some publicly accessible through web-portals. - At the next stage, an electronic patients dossier will be developed and maintained. - Education: - Fiscal consolidation necessitates measures to increase the financial independence of the education sector, including attracting private capital to improve links between education and the labor market. - New practices in financing education and pre-school education are defined in the new Law on Pre-School and School Education, to be adopted in 2012. - Implementation aims to enhance transparency and effectiveness of public expenditures through financing education output, accelerate school network optimization, and contribute to broader pupil coverage by linking financing to the number of students. - The World Bank will provide assistance for institutional reforms in education targeted at: - improving quality of primary and secondary education through strengthening schools’ reporting systems and external evaluation; - improving quality and significance of higher education through better management, stricter control over accreditation, and linking government financing to output. - Railroads: - Restructuring of railroad companies has started as a prior action for financing from the World Bank. - Plans aim at better cost recovery, competitive tendering for public services and infrastructure maintenance, abolishment of losses, and liquidation of arrears. - EU funds absorption: - Authorities have given high political priority to addressing low rates of EU funds utilization. - In 2011 the ambitious goal is to increase annual absorption of EU funds to the level equal to the total absorption for the period 2007-10. - It is expected that the goal will be comfortably met. *Source: _cr11179 - introduction of the Financial Stability Pact. The government submitted a draft for* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11179.pdf_