## _cr1423

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### Context and near-term environment
- Bulgaria remains the poorest EU member with income levels about half the EU average (improved from one-third in 2002); income convergence has been slow.
- Social and political turbulence in the current year: right-of-center government resigned in February; left-of-center coalition formed in May holding half of parliamentary seats.
- Policy challenge: safeguard macroeconomic and financial stability while developing a new growth and job-creation paradigm not dependent on pre-crisis extraordinary inflows.
- Structural impediments noted: adverse demographic changes accelerated by emigration; institutional and structural rigidities; need to enhance domestic competition, reinforce rule of law, address infrastructure gaps, and strengthen human capital.

### Recent macroeconomic performance and fundamentals
- Output and labor:
  - Output has not recovered to pre-crisis levels; employment fell by 13 percent from its peak.
  - Growth: GDP 1.8, 0.8, 0.2 (2011, 2012, 2013H1).
  - Private consumption: 1.5, 2.6, 0.0 (2011, 2012, 2013H1).
  - Public consumption: 1.6, -1.3, 3.5 (2011, 2012, 2013H1).
  - Gross fixed investment: -6.5, 0.8, -0.9 (2011, 2012, 2013H1).
  - Net exports and inventories: 2.1, -0.9, -0.2 (2011, 2012, 2013H1).
- External and financial positions:
  - Current account: deficit of 25 percent of GDP in 2007; small surplus in recent years and surplus projected in 2013.
  - Reserve adequacy index: 129 (Table 1).
  - FDI about 3 percent of GDP a year.
  - Banks’ foreign liabilities declined; banks’ net foreign assets positive for the first time since 2006.
  - Stock market capitalization and domestic public debt about 10 percent of GDP each.
- Fiscal and price indicators:
  - Fiscal deficit fell to 0.5 percent of GDP in 2012.
  - Public debt at 17.6 percent of GDP at end-2012.
  - Inflation low; turned negative in second half of 2013 after electricity price reductions.
  - Credit growth flat in 2013; NPLs 17.2 percent of loans in September with coverage by provisions 72.7 percent.
- Competitiveness and labor market:
  - REER broadly in line with fundamentals; slight undervaluation estimated.
  - Real unit labor costs remain higher than in boom years amid rising nominal wages.
  - Unemployment has structural features with age, gender, and regional disparities.

### Economic outlook and risk assessment
- Staff baseline projections:
  - Baseline GDP growth projected to increase from ½ percent in 2013 to 3 percent in the medium term.
  - EU projected to reach growth rate of 2 percent by 2018; a 1 percentage point difference implies very gradual income convergence.
  - Even with a sustained growth differential of 2 percentage points, full income convergence would take four decades.
  - Inflation projected positive but subdued short term; current account expected to return to a modest deficit financed by FDI.
- Selected numeric outlook (from tables):
  - Real GDP: 0.4 (2010); 1.8 (2011); 0.8 (2012); 0.5 (2013); 1.6 (2014); 2.5 (2015); 3.0 (2016); 3.0 (2017); 3.0 (2018).
  - CPI (HICP, average): 3.0 (2010); 3.4 (2011); 2.4 (2012); 0.4 (2013); 0.8 (2014); 1.8 (2015); 2.3 (2016); 2.5 (2017); 2.5 (2018).
  - Unemployment rate: 10.3 (2010); 11.3 (2011); 12.4 (2012); 12.4 (2013); 11.9 (2014); 11.3 (2015); 10.7 (2016); 10.1 (2017); 9.5 (2018).
- Risk Assessment Matrix (selected high-likelihood / high-impact risks):
  - Inadequate implementation of structural reforms (Relative Likelihood: High; Impact if Realized: High).
  - Protracted slower European growth (Relative Likelihood: High; Impact if Realized: High).
  - Other risks of medium likelihood: NPLs/asset price uncertainty, emerging-market slowdown, re-emergence of euro-area financial stress.

### Fiscal policy, 2014 budget, and pension reform reversals
- 2014 budget targets and composition:
  - Targets a deficit of 1.8 percent of GDP for 2014; structural deficit little changed.
  - Tax revenues budgeted to rise by about 1 percent of GDP, mainly through administrative measures.
  - New national investment fund expected at 0.6 percent of GDP to finance municipal investment.
  - Government’s 2014–16 fiscal framework implies a structural deficit of 1 percent of GDP; Bulgaria’s maximum structural deficit under the new public finance law and the EU medium-term objective is 1 percent of GDP (given that public debt is under 40 percent of GDP) on an accrual basis.
  - Headline cash deficit ceiling specified at 2 percent of GDP (average annual difference between cash and accrual 0.2 percent of GDP in recent years).
- Pension reform reversals (Box 1):
  - From July 2014, automatic indexation will be implemented based on the “golden Swiss rule” that links pension increases to the average growth of insurable income and CPI inflation.
  - The gradual increase in the retirement age (started in 2012 to reach 65 years for men by 2017 and 63 years for women by 2020) has been halted.
  - The pension deficit by 2040 is now projected to be near 6 percent of GDP instead of 4 percent of GDP.
  - The deficit is financed by the budget and crowds out other spending as the population ages.
  - Note: Includes average pension increase of 9.3 percent as of April 1, 2013.
- Fiscal policy assessment and recommendations:
  - Fiscal impulse in 2013 and neutral fiscal stance for 2014 judged appropriate given the unanticipated slowing in 2013.
  - Recommendation to rebuild fiscal buffers over time by targeting a balanced structural budget after 2016 to allow a substantial liquidity buffer in the fiscal reserve and to allow automatic stabilizers to work.
  - Implementation risks: revenues may underperform; with the budgeted deficit near limits, expenditures need restraint and spending pressures managed.

### Fiscal institutions, contingent liabilities, and public investment
- New public finance law and fiscal council:
  - Independent fiscal body to be established with 5 members (including a chairperson) elected by parliament and one administrative staff.
  - Fiscal council mandate: issue opinions on draft budget and budget execution, monitor fiscal rules, activate corrective mechanisms and escape clauses.
  - Importance of ensuring efficiency and transparency in management of the new public investment fund and supporting fiscal council independence with adequate staff and resources.
- Fiscal risks and contingent liabilities:
  - Medium-term fiscal risks from pension reform reversal and contingent liabilities related to some state-owned enterprises.
  - Railroad sector: traffic declined about 70 percent since mid-1990s; annual subsidies amount to ½ percent of GDP; state railway defaulted in 2010 and privatization efforts on hold.
  - Energy sector: BEH accounts for almost half of generating capacity; NEK faces financial difficulties; BEH issued an international bond to provide NEK liquidity.
  - European Commission suggestion: provide details on contingencies in budget documents.

### Financial sector stability, NPLs, and supervisory transition
- Financial soundness and liquidity:
  - System stable and liquid; profitability declined.
  - External liabilities of banking system declined to 16 percent of GDP from an end-2008 peak of 27 percent.
  - All banks met minimum regulatory capital requirement of 12 percent; system-wide capital at 16.9 percent of risk-weighted assets as of September 2013.
- Nonperforming loans and insolvency framework (Box 3):
  - NPLs: 17.2 percent of loans as of September; most impaired loans over 180 days past due.
  - NPL coverage by provisions: 72.7 percent.
  - Constraints to NPL resolution: depressed real estate market; ineffective and unpredictable insolvency framework; foreclosure uncertainty; tax disincentives for quick write offs; underdeveloped market for distressed assets.
  - Policy recommendations:
    - Reduce NPLs through asset disposal and release of associated collateral.
    - Reforms to insolvency framework including fast-track court approval for pre-agreed reorganization plans and out-of-court debt restructuring guidelines.
    - Adjust tax treatment of loan losses to remove disincentives to write offs.
- Transition to CRD IV and supervisory approach (Box 4):
  - Under IFRS, expected losses from future events not taken into account; BNB complemented IFRS provisions with “specific provisions” (expected loss model) deducted from regulatory capital.
  - Under CRD IV specific provisions will need to be phased out.
  - Authorities plan to preserve buffers using national discretion: impose maximum capital conservation and systemic capital buffers under Pillar 1; use Pillar 2 to impose higher capital requirements on higher-risk institutions.
  - Authorities intend to maintain conservative supervision and do not intend to participate in the close cooperation framework of the Single Supervisory Mechanism, citing absence of liquidity and solvency support and lack of ECB Governing Council voting rights for non-euro area participants.

### Structural reforms and competitiveness
- Structural constraints and priorities:
  - Bulgaria performs well on macro-policy outcomes but poorly on enforcing contracts, resolving insolvencies, and reducing red tape; judicial system problematic with corruption and cronyism widespread.
  - Employment losses were large relative to GDP decline; unemployment disproportionately affected young and rural populations.
  - Policy priorities:
    - Improve infrastructure, human capital, and ease of doing business.
    - Confront corruption, rent-seeking, and institutional gaps; reform judiciary and anti-monopoly and anti-corruption regimes.
    - Improve education and training, including for excluded social groups (Roma).
    - Increase absorption of EU funds.
    - Carefully weigh labor-cost policies for lower skilled and young workers; consider minimum-wage differentiation implications.
- Authorities’ stance:
  - View pension sustainability as important and characterize halt in retirement-age increases as temporary.
  - Aim to improve targeting and effectiveness of social transfers, especially for children and older people, and seek more efficient health-care spending.
  - Continue efforts to reduce administrative burden and improve public procurement.

### Debt sustainability analyses and external sector projections (Appendix I)
- External debt dynamics:
  - External debt peaked at 108 percent of GDP at end-2009 and declined to 95 percent of GDP at end-2012, mainly due to private sector deleveraging.
  - Bank external debt fell from 24 percent of GDP at end-2009 to 16 percent of GDP at end-2012.
  - Excluding inter-company lending, external debt was 55 percent of GDP at end-2012, largely offset by international reserves.
- Baseline DSA projections and scenarios:
  - Baseline: gross external debt declines further and reaches around 72 percent of GDP by 2018 primarily due to nominal GDP growth; nominal external debt falls by 3 percent from 2012 to 2018.
  - Under shocks (interest rate, growth, current account), the highest external debt reached by 2017 is 86 percent of GDP.
- Public debt outlook:
  - Public debt remains low: baseline public indebtedness around 20 percent of GDP.
  - Public debt risks: unaccounted contingent liabilities and aging-related spending pressures following pension reform reversal.
  - Selected public sector DSA figures (percent of GDP): nominal gross public debt series includes 28.6, 15.4, 17.6, 17.2, 21.1, 20.6, 20.9, 20.2, 19.0.

### Executive Board and policy priorities
- Directors commended authorities for maintaining macroeconomic and financial stability.
- Key recommendations:
  - Complement prudent macro policies with decisive structural reforms to boost growth, job creation, and income convergence.
  - Preserve credibility under the currency board by observing national and EU deficit rules.
  - Rebuild fiscal buffers by targeting a balanced structural budget over time and be prepared to adjust spending if revenues fall short.
  - Improve targeting and efficiency of social spending (including healthcare), reinstate needed pension reforms, and address risks in some state-owned enterprises.
  - Ensure rapid and efficient absorption of EU funds.

*Source: IMF staff report (BULGARIA) excerpt from the supplied PDF content.*

### 1. Pension Reform Reversals _____________________________________________________________________ 16

### 1. Pension Reform Reversals

### Context: A need for growth
- Bulgaria has pursued policies supporting macroeconomic and financial stability for over a decade, yet income convergence with the EU has been slow.
- Bulgaria remains the poorest EU member, with income levels about half the EU average (improved from one-third in 2002), but the gap in absolute incomes has widened over the last decade (WEO data).
- The current year has seen social and political turbulence:
  - Right-of-center government resigned in February following street protests sparked by high electricity bills.
  - After elections, a left-of-center coalition was formed in May holding just half of parliamentary seats and faced new protests over a controversial appointment.
- Policy challenge: need to safeguard stability while developing a new growth and job-creation paradigm not dependent on pre-crisis extraordinary inflows.
- Structural impediments cited: adverse demographic changes accelerated by emigration; institutional and structural rigidities; need to enhance domestic competition, reinforce rule of law, address infrastructure gaps, and strengthen human capital.

### Background: Little growth momentum but solid fundamentals
- Growth and labor:
  - Output has not recovered to pre-crisis levels; employment fell by 13 percent from its peak.
  - Growth declined from 0.8 percent in 2012 to 0.2 percent in the first half of 2013; GDP began to recover in Q3 2013 to an estimated 1.5 percent year-on-year as exports continued to perform well.
- Sectoral contributions (real percent change year on year, selected):
  - GDP: 1.8, 0.8, 0.2 (2011, 2012, 2013H1 as presented)
  - Private consumption: 1.5, 2.6, 0.0
  - Public consumption: 1.6, -1.3, 3.5
  - Gross fixed investment: -6.5, 0.8, -0.9
  - Net exports and inventories: 1/ 2.1, -0.9, -0.2
- External and financial positions:
  - Current account reached deficit of 25 percent of GDP in 2007; now registering a small surplus.
  - Reserve adequacy index: 129 (Table 1).
  - Financial inflows are moderate and stable; FDI about 3 percent of GDP a year.
  - International investment position improved with fall in external debt.
  - Banks’ foreign liabilities reduction driven by plentiful bank liquidity; positive net foreign asset position for the first time since 2006.
  - Vulnerability to tapering swings limited; stock market capitalization and domestic public debt about 10 percent of GDP each.
- Fiscal position:
  - Fiscal deficit fell to 0.5 percent of GDP in 2012, below budgeted deficit of 1.3 percent of GDP.
  - Public debt at 17.6 percent of GDP at end-2012 (second lowest in EU); debt sustainability analysis shows it well contained (Appendix I).
- Inflation, credit, and banking:
  - Inflation low and in line with trading partners; following reductions in administered electricity prices, inflation turned negative in the second half of 2013.
  - Credit growth peaked at 63 percent in 2007; flat in 2013 and described as negligible in recent months.
  - Financial sector capitalization and liquidity are high.
  - Gross nonperforming loans (NPLs) amounted to 17.2 percent of loans in September; coverage by provisions 72.7 percent.
- Real exchange rate and competitiveness:
  - REER broadly in line with fundamentals; estimates suggest slight undervaluation.
  - Current account somewhat stronger than norm; export market share gradually increased.
  - Real unit labor costs remain higher than in the boom years with continued increases in nominal wages.
- Labor market:
  - Reductions in unemployment over the last decade erased by the crisis.
  - Employment rose slightly in 2013, but unemployment rate has not begun to decline as more people entered the workforce.
  - Given small output gap, most unemployment is structural with significant age, gender, and regional disparities.

### Economic outlook and risks
- Staff projections and baseline:
  - Output projected to recover slowly as domestic demand recovers and exports and FDI benefit from European recovery.
  - Inflation projected to be positive but subdued in short term; slightly above that in the EU in medium term given faster tradables-sector productivity and wage growth.
  - Current account expected to return to a modest deficit in the medium term financed by FDI.
  - Baseline GDP growth projected to increase from ½ percent in 2013 to 3 percent in the medium term.
  - EU projected to reach growth rate of 2 percent by 2018; a 1 percentage point difference implies very gradual income convergence.
  - Even with a sustained growth differential of 2 percentage points, full income convergence would take four decades.
- Risk Assessment Matrix (selected risks, relative likelihood, and impact if realized):
  1. Inadequate implementation of structural reforms to raise productivity and offset emigration and aging (short/medium term)
     - Relative Likelihood: High
     - Impact if Realized: High — intensified political and social discord postpones reform agenda; Low potential growth, high structural unemployment, increased fiscal pressures.
  2. Excess fiscal relaxation (medium term)
     - Relative Likelihood: Low
     - Impact if Realized: High — heightened spending pressures; loss of fiscal prudence advantage; increased vulnerability to shocks.
  3. NPLs leave asset price uncertainty (short/medium term)
     - Relative Likelihood: Medium
     - Impact if Realized: Medium — impediments to releasing collateral (judicial bottlenecks, administrative costs); lower investment reduces growth.
  4. Protracted slower European growth (medium term)
     - Relative Likelihood: High
     - Impact if Realized: High — negative trade and investment effects; low potential growth, high structural unemployment, low FDI; continued downturn raises fiscal pressures.
  5. Deeper emerging market slowdown (short/medium term)
     - Relative Likelihood: Medium
     - Impact if Realized: Medium — negative trade channels; low potential growth, high structural unemployment.
  6. Financial stress in the euro area re-emerges (short term)
     - Relative Likelihood: Medium
     - Impact if Realized: Medium — adverse effects via parent banks/corporates and trade; funding pressures; lower exports, employment, FDI; continued downturn raises fiscal pressures.
- Staff recommendations in view of risks:
  - Move ahead with growth-enhancing reforms and reinforce defenses to support readiness to respond to adverse shocks.
  - Response to sizable adverse shocks would include utilization of automatic stabilizers, as long as financing conditions permit.

### Authorities’ views
- Authorities broadly agree with staff on outlook and risks:
  - Saw slightly more near-term upside with stronger domestic demand recovery.
  - Noted baseline projections exclude potential “South Stream” gas pipeline; construction expected to begin in 2014 by the authorities.
  - Agreed on external downside risks but highlighted export diversification to emerging markets reducing vulnerability.
  - Emphasized financial buffers and that NPLs do not pose stability concerns; acknowledged structural constraints (including legal system) negatively affect pace of disposal of seized collateral.

### Policies to accelerate growth and preserve stability
- Framework and commitment:
  - Robust policy framework (currency board, low fiscal deficits/debt, conservative banking supervision) has supported stability since 1997 crisis and EU membership.
  - Authorities committed to policies supporting the currency board as natural bridge to euro adoption, while pursuing broader reforms to raise growth, lower unemployment, and reduce migration incentives.

A. Fiscal policy: safeguarding consolidation and improving spending composition
- Recent fiscal developments and drivers:
  - After several years of consolidation, fiscal deficit projected to increase to 2 percent of GDP in 2013; structural deficit projected at 1 percent of GDP.
  - About half of the deficit increase results from pension increases (after a three-year freeze).
  - Spending related to EU funds set to rise by 1¼ percent of GDP, largely offset by EU grants.
  - Administrative improvements raised tax revenues helping contain the deficit.
  - Public financing needs remain low.
  - Fiscal reserve stable at about 6 percent of GDP (mostly working balances and pledged funds), compared to pre-crisis peak of 17 percent of GDP.

*Source: IMF staff report excerpt (BULGARIA).*

### 13.      The 2014 budget, consistent with national rules and EU objectives, targets a deficit of

### _cr1423 - 13.      The 2014 budget, consistent with national rules and EU objectives, targets a deficit of

### Fiscal outlook and 2014 budget
- Targets a deficit of 1.8 percent of GDP for 2014, leaving the structural deficit little changed.
- Tax revenues are budgeted to rise by about 1 percent of GDP, mainly through further administrative measures.
- An increase in social protection spending has been budgeted while operational expenditures are expected to be restrained.
- A new national investment fund (0.6 percent of GDP) is expected to finance municipal investment following a competitive bidding process overseen by the Council of Ministers.
- The government’s 2014–16 fiscal framework implies a structural deficit of 1 percent of GDP, consistent with national rules and EU objectives, with spending increases concentrated on investment.
- Bulgaria’s maximum structural deficit under the new public finance law and the EU medium-term objective is 1 percent of GDP (given that public debt is under 40 percent of GDP) on an accrual basis.
- National rules specify a headline cash deficit ceiling of 2 percent of GDP (the annual difference between cash and accrual is small with an average of 0.2 percent of GDP in recent years).

### Pension reform reversals (Box 1)
- From July 2014, automatic indexation will be implemented based on the “golden Swiss rule” that links pension increases to the average growth of insurable income and CPI inflation.
- The gradual increase in the retirement age (part of the 2011 reform, started in 2012 to reach 65 years for men by 2017 and 63 years for women by 2020) has been halted.
- The pension deficit by 2040 is now projected to be near 6 percent of GDP instead of 4 percent of GDP.
- The deficit is financed by the budget and crowds out other spending, which is increasingly coming under pressure as the population ages.
- Includes average pension increase of 9.3 percent as of April 1, 2013 (note in source: 1/ Includes average pension increase of 9.3 percent as of April 1, 2013).

### Fiscal institutions and governance
- The new public finance law (entering into force in 2014) and EU legislation require the government to set up an independent fiscal body.
- The fiscal council being established consists of 5 members (including a chairperson) that will be elected by parliament, and one administrative staff.
- The fiscal council’s mandate will include issuing opinions on the draft budget and budget execution, monitoring fiscal rules, and activating corrective mechanisms and escape clauses.
- Importance of ensuring efficiency and transparency in management of the new public investment fund, and supporting the independence of the new fiscal council through adequate staff and resources.

### Policy assessment and recommended fiscal path
- The fiscal impulse in 2013 and the neutral fiscal stance for 2014 are judged appropriate given the unanticipated slowing of the economy in 2013.
- Composition of spending improved through an increase in the share of investment spending and greater absorption of EU funds.
- Keeping the structural deficit unchanged in 2014 balances postponing consolidation given modest projected growth and maintaining fiscal credibility under the currency board by observing domestic deficit limits and EU objectives.
- Implementation risks noted: revenues may underperform if domestic demand or administrative reforms disappoint or if inflation is subdued; with the budgeted deficit already at or near deficit limits, expenditures would need to be restrained and heightened spending pressures carefully managed to meet the deficit target.
- Recommendation to rebuild fiscal buffers over time by targeting a balanced structural budget after 2016 to: 
  - allow a substantial liquidity buffer to be built up in the fiscal reserve in good times, and 
  - allow automatic stabilizers to work in the event of a shock.
- Rebuilding the fiscal reserve by saving fiscal surpluses would bolster defenses given shallow domestic financial markets, periodic closing of international markets, intervention limitations inherent in the currency board, and prevailing risks.

### Social spending targeting and efficiency
- Scope exists to improve targeting and efficiency of social spending.
- Recent studies suggest social protection spending helped mitigate income effects of the crisis but show relatively weak results in poverty reduction and substantial inefficiencies, particularly in health-related spending.
- Given constrained fiscal space, reforms should focus on improving allocation of existing social protection spending and provide room for greater social assistance spending, for which coverage is currently low.

### Fiscal risks and contingent liabilities
- Medium-term fiscal risks arise from the reversal of pension reform and from contingent liabilities related to some state-owned enterprises.
- Pension reform reversals add to long-term budgetary pressures from an aging population; adverse budgetary implications are limited in early years but substantial over the longer term.
- Weak financial position of firms in the railroad sector and some segments of the energy sector could represent significant fiscal risks if not adequately addressed.
- As suggested by the European Commission, details on such contingencies should be provided in budget documents.

### Energy and railroad sectors (Box 2)
- Energy:
  - State-owned Bulgaria Energy Holding (BEH) accounts for almost half of Bulgaria’s generating capacity.
  - A large BEH subsidiary, the National Electricity Company (NEK), faces financial difficulties given contractual obligations to high purchase prices coupled with low administered prices.
  - BEH has issued an international bond to provide NEK with liquidity and NEK’s energy exports have been expanded.
  - Sustained efforts to address NEK’s situation are needed to avoid future impact on the government’s budget.
- Railroads:
  - Traffic has declined about 70 percent since the mid-1990s, and annual subsidies amount to ½ percent of GDP.
  - The state railway operator defaulted in 2010 and is negotiating with its creditors.
  - A reform agreed with the World Bank and privatization efforts for the freight company are currently on hold.

### Authorities’ stance
- Authorities committed to remaining within the 2 percent of GDP domestic deficit ceiling in 2014 and maintaining a structural deficit of about 1 percent of GDP through 2016.
- Agreed that a return to a balanced structural budget over time would be useful to help rebuild buffers.
- See the creation of the public investment fund as a way to increase investment at the municipal level.
- Recognize importance of pension sustainability and view halt in increases to the retirement age as temporary.
- Aim to improve accessibility and effectiveness of social transfers and services, in particular for children and older people, and acknowledge the need for more efficient health care spending.

### Financial sector: stability and recovery
- Financial system remains stable and liquid, although profitability has declined.
- Liquidity plentiful due to rising deposits and low credit demand.
- External liabilities of the banking system declined to 16 percent of GDP compared to an end-2008 peak of 27 percent.
- Banks’ net foreign assets reached a small surplus compared to a peak deficit of 18 percent of GDP in 2008.
- IFRS provisioning for NPLs has affected profits, but capital adequacy remains high with all banks meeting the minimum regulatory requirement of 12 percent and system-wide capital at 16.9 percent of risk-weighted assets as of September 2013.

### Nonperforming loans (NPLs) and insolvency (Box 3)
- As of September, 17.2 percent of loans were classified as impaired (with most of them in excess of 180 days past due).
- Some banks have been more proactive in resolving NPLs by claiming and removing associated collateral, though this is made difficult by a depressed real estate market and an ineffective and unpredictable insolvency framework.
- Constraints limiting NPL resolution progress:
  - With NPLs well provisioned, many banks adopt a “wait and see approach.”
  - Foreclosure process marked by uncertainty about cost, length, and outcome.
  - Disincentives in the tax system for quick write offs (uncertainty when losses can be recognized for tax purposes).
  - Limited scope for market-based solutions: underdeveloped market for distressed assets, limited experience with direct sales and securitization.
- Policy recommendations:
  - Reduce NPLs through asset disposal and release of associated collateral to reduce administrative and legal costs and support future investment.
  - Further reforms to insolvency framework, including a fast-track court approval procedure for pre-agreed reorganization plans and out-of-court debt restructuring guidelines.
  - Adjust treatment of loan losses in the tax system to remove disincentives to write offs.

### Transition to CRD IV and bank supervision (Box 4)
- Under IFRS, expected losses from future events and forward-looking considerations are not taken into account; BNB supervisory authorities have complemented IFRS provisions with additional capital cushions (“specific provisions”) calculated on an expected loss model and deducted from regulatory capital.
- Specific provisions are a segregated part of capital that do not affect reported profits (unlike IFRS provisions) but are excluded when computing regulatory capital.
- Under CRD IV specific provisions will need to be phased out.
- Authorities plan to preserve appropriate buffers by using national discretion under CRD IV:
  - Use flexibility under Pillar 1 to impose the maximum capital conservation and systemic capital buffers on all banks.
  - Use national discretion under Pillar 2 to impose higher capital requirements on institutions exhibiting a higher risk profile.
- Authorities intend to maintain a conservative approach to bank supervision, aiming to keep high capital and liquidity buffers and conservative collateral valuation.
- Authorities do not intend to participate in the close cooperation framework of the Single Supervisory Mechanism, citing absence of liquidity and solvency support and lack of voting rights in the Governing Council of the ECB for non euro area participants, while remaining engaged in European reform processes.

### Structural reforms, labor market, and competitiveness
- Bulgaria ranks favorably on macro-policy outcomes but less well on enforcing contracts, resolving insolvencies, and areas of red tape; judicial system viewed as problematic, with corruption and cronyism widespread.
- Employment losses following the crisis were large relative to comparators and to the fall in GDP; unemployment disproportionately affected the young and those in rural areas.
- Factors: employment gains during the boom were concentrated in construction and manufacturing (hard hit by the crisis); infrastructure and education gaps contributed to low productivity.
- Use of active labor market policies was relatively limited but has recently increased.
- Policy priorities:
  - Tackle structural rigidities through improvements in infrastructure, human capital, and ease of doing business.
  - Confront corruption, rent-seeking behavior, and institutional gaps, including reforms to the judiciary and anti-monopoly and anti-corruption regimes.
  - Improve education and training, including for excluded social groups (Roma).
  - Increase absorption of EU funds to boost infrastructure and demand for low-skilled labor.
  - Carefully weigh government actions affecting the cost of labor for the lower skilled and young, and consider implications of minimum wage differentiation by region and age.
- Authorities view reforms in the business environment, the judiciary, and anti-monopoly regime as important and highlight efforts to reduce administrative burden on businesses and improve public procurement.
- Authorities do not believe a differentiated minimum wage would help reduce structural unemployment, citing broader structural constraints to investment and employment in hardest hit regions.

*Source: IMF staff report (BULGARIA) contained in the supplied PDF content.*

### 31.      After the crisis of 1997 that destroyed banks and decimated savings, policymakers

### _cr1423 - 31.      After the crisis of 1997 that destroyed banks and decimated savings, policymakers

### Economic stability and strategy
- After the crisis of 1997 that destroyed banks and decimated savings, policymakers successfully established a robust policy framework tested under domestic and external shocks.
- Bulgaria is performing well in terms of economic stability, but performance lags in other areas.
- Recommended strategy: complement continued macroeconomic and financial stability with accelerated efforts on removing key structural impediments to boost growth and strengthen employment.

### Fiscal policy
- Fiscal policy is maintaining an appropriate balance.
- The limited consolidation implied by the 2014 budget is appropriate but there are implementation risks.
- Authorities should be prepared to adjust spending to achieve the deficit target which is near domestic and EU limits.
- The intended shift to capital spending is welcome but needs to be accompanied by appropriate project selection procedures.
- Fiscal buffers should be rebuilt by targeting a balanced structural budget over time.
- The additional spending pressures resulting from the recent reversal of pension reforms will need to be addressed.

### Financial sector
- The financial sector remains stable.
- Authorities’ intention to maintain financial sector buffers under the new framework is appropriate.
- Recent steps taken by some banks to reduce NPLs through asset disposal should be further encouraged to reduce asset price uncertainty and support future investment.
- Steps taken by the authorities to preserve their conservative supervisory approach in the changing European framework are appropriate.

### Structural policies and reforms
- Structural policies require new impetus.
- Key issue: governance reform, including in the judicial system and anti-corruption and anti-monopoly regimes, to help support macroeconomic performance and stability over the medium term.
- EU funds should continue to be absorbed rapidly.
- Further improvements in education and training are needed to reduce labor market rigidities.

*Source: _cr1423 - 31. After the crisis of 1997 that destroyed banks and decimated savings, policymakers — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1423.pdf*

### 35.      It is recommended that the next Article IV consultation with Bulgaria be held on the

### It is recommended that the next Article IV consultation with Bulgaria be held on the standard 12-month cycle.

### Macroeconomic outlook: output, inflation, and labor market
- Real GDP: 0.4 (2010); 1.8 (2011); 0.8 (2012); 0.5 (2013); 1.6 (2014); 2.5 (2015); 3.0 (2016); 3.0 (2017); 3.0 (2018).
- Real domestic demand: -5.1 (2010); 0.3 (2011); 3.5 (2012); -0.9 (2013); 1.5 (2014); 3.1 (2015); 3.7 (2016); 3.5 (2017); 3.5 (2018).
- Consumer price index (HICP, average): 3.0 (2010); 3.4 (2011); 2.4 (2012); 0.4 (2013); 0.8 (2014); 1.8 (2015); 2.3 (2016); 2.5 (2017); 2.5 (2018).
- Nominal wages (national accounts definition): 11.2 (2010); 8.6 (2011); 5.6 (2012); 4.5 (2013); 5.0 (2014); 5.5 (2015); 5.5 (2016); 5.5 (2017); 5.5 (2018).
- Unemployment rate (percent of labor force): 10.3 (2010); 11.3 (2011); 12.4 (2012); 12.4 (2013); 11.9 (2014); 11.3 (2015); 10.7 (2016); 10.1 (2017); 9.5 (2018).
- Output gap (percent of potential GDP): -3.2 (2010); -2.4 (2011); -1.8 (2012); -2.1 (2013); -1.8 (2014); -0.9 (2015); 0.0 (2016); 0.0 (2017); 0.0 (2018).

### Public finances: revenue, expenditure, debt, and fiscal balances
- General government revenue (percent of GDP): 32.7 (2010); 32.4 (2011); 34.2 (2012); 36.3 (2013); 36.5 (2014); 37.1 (2015); 37.1 (2016); 37.2 (2017); 37.3 (2018).
  - Grants (percent of GDP): 2.3 (2010); 1.9 (2011); 3.1 (2012); 4.3 (2013); 4.1 (2014); 4.3 (2015); 4.1 (2016); 4.2 (2017); 4.2 (2018).
- Expenditure (percent of GDP): 36.7 (2010); 34.4 (2011); 34.6 (2012); 38.3 (2013); 38.3 (2014); 38.6 (2015); 38.2 (2016); 37.8 (2017); 37.3 (2018).
- Balance (net lending/borrowing on cash basis, percent of GDP): -4.0 (2010); -2.0 (2011); -0.5 (2012); -2.0 (2013); -1.8 (2014); -1.5 (2015); -1.1 (2016); -0.5 (2017); 0.0 (2018).
- Structural balance (percent of GDP): -2.9 (2010); -1.1 (2011); 0.2 (2012); -1.2 (2013); -1.1 (2014); -1.1 (2015); -1.1 (2016); -0.5 (2017); 0.0 (2018).
- Gross public debt (percent of GDP): 14.9 (2010); 15.4 (2011); 17.6 (2012); 17.5 (2013); 21.2 (2014); 20.5 (2015); 22.0 (2016); 19.5 (2017); 19.0 (2018).
- Privatization proceeds (percent of GDP): 0.1 (2010); 0.3 (2011); 0.1 (2012); 0.2 (2013); 0.2 (2014); 0.0 (2015); 0.0 (2016); 0.0 (2017); 0.0 (2018).

### Balance of payments and external sector
- Current account balance (percent of GDP): -1.5 (2010); 0.1 (2011); -1.3 (2012); 0.4 (2013); -0.9 (2014); -1.9 (2015); -2.3 (2016); -2.5 (2017); -2.6 (2018).
  - Merchandise trade balance (percent of GDP): -7.7 (2010); -5.6 (2011); -9.1 (2012); -6.3 (2013); -7.1 (2014); -7.5 (2015); -8.1 (2016); -8.5 (2017); -9.1 (2018).
- Capital and financial account balance (percent of GDP): -1.1 (2010); -1.3 (2011); 7.0 (2012); -3.2 (2013); 4.7 (2014); 2.9 (2015); 5.9 (2016); 3.1 (2017); 4.6 (2018).
  - Foreign direct investment balance (percent of GDP): 2.7 (2010); 3.1 (2011); 3.3 (2012); 2.8 (2013); 3.5 (2014); 3.9 (2015); 4.0 (2016); 4.0 (2017); 4.1 (2018).
- International investment position (percent of GDP): -95 (2010); -86 (2011); -81 (2012); -79 (2013); -78 (2014); -74 (2015); -71 (2016); -68 (2017); -65 (2018).
- Gross official reserves (millions of euros): 12,977 (2010); 13,349 (2011); 15,553 (2012); 14,412 (2013); 16,001 (2014); 16,428 (2015); 18,022 (2016); 18,327 (2017); 19,347 (2018).
  - Reserves in months of imports: 6.1 (2010); 5.8 (2011); 6.7 (2012); 5.9 (2013); 6.1 (2014); 6.3 (2015); 6.4 (2016); 6.1 (2017); 6.0 (2018).
  - Reserves as percent of broad money: 50 (2010); 46 (2011); 49 (2012); 42 (2013); 44 (2014); 43 (2015); 44 (2016); 43 (2017); 42 (2018).

### External liabilities, debt, and financing indicators
- Gross external debt (percent of GDP, memorandum): 102.7 (2010); 94.1 (2011); 94.8 (2012); 92.7 (2013); 92.7 (2014); 87.3 (2015); 83.6 (2016); 77.0 (2017); 72.3 (2018).
- Short-term external debt (percent of GDP, memorandum): 31.1 (2010); 26.2 (2011); 26.3 (2012); 26.3 (2013); 25.9 (2014); 25.0 (2015); 24.0 (2016); 22.9 (2017); 21.9 (2018).
- Gross external financing requirement (percent of GDP): 45.1 (2010); 36.5 (2011); 38.1 (2012); 29.4 (2013); 27.9 (2014); 29.0 (2015); 29.2 (2016); 30.2 (2017); 27.4 (2018).
- Gross international reserves (millions of euros, memorandum repeated): 12,977 (2010); 13,349 (2011); 15,553 (2012); 14,412 (2013); 16,001 (2014); 16,428 (2015); 18,022 (2016); 18,327 (2017); 19,347 (2018).

### Fiscal operations (levels and percent of GDP)
- Nominal GDP (millions of leva): 70,511 (2010); 75,308 (2011); 77,582 (2012); 78,792 (2013); 80,689 (2014); 84,171 (2015); 88,665 (2016); 93,608 (2017); 98,827 (2018).
- General government revenue (millions of leva): 23,053 (2010); 24,435 (2011); 26,516 (2012); 28,570 (2013); 29,454 (2014); 31,204 (2015); 32,883 (2016); 34,858 (2017); 36,894 (2018).
- General government expenditure (millions of leva): 25,877 (2010); 25,923 (2011); 26,874 (2012); 30,169 (2013); 30,904 (2014); 32,465 (2015); 33,879 (2016); 35,367 (2017); 36,898 (2018).
- Net acquisition of nonfinancial assets (millions of leva): 3,045 (2010); 2,950 (2011); 3,600 (2012); 4,644 (2013); 4,660 (2014); 5,313 (2015); 5,620 (2016); 6,024 (2017); 6,472 (2018).
- Fiscal reserve account (millions of leva, memorandum): 6,012 (2010); 4,999 (2011); 6,081 (2012); 5,010 (2013); 6,829 (2014); 5,658 (2015); 6,926 (2016); 5,115 (2017); 5,694 (2018).

### Monetary and financial conditions
- Broad money (M3, percent change): 6.4 (2010); 12.2 (2011); 8.4 (2012); 8.7 (2013); 5.9 (2014); 5.5 (2015); 5.9 (2016); 6.2 (2017); 6.7 (2018).
- Domestic private credit (percent change): 1.3 (2010); 3.8 (2011); 2.8 (2012); 0.3 (2013); 3.6 (2014); 5.3 (2015); 6.7 (2016); 9.0 (2017); 9.0 (2018).
- Monetary survey, broad money (billion leva): 50.7 (2010); 56.9 (2011); 61.7 (2012); 67.1 (2013); 71.0 (2014); 74.9 (2015); 79.3 (2016); 84.2 (2017); 89.9 (2018).
- Reserve money (billion leva): 14.1 (2010); 14.9 (2011); 17.4 (2012); 18.7 (2013); 19.0 (2014); 19.4 (2015); 19.8 (2016); 20.3 (2017); 20.8 (2018).
- Money multiplier (ratio): 3.59 (2010); 3.82 (2011); 3.55 (2012); 3.59 (2013); 3.74 (2014); 3.87 (2015); 4.00 (2016); 4.15 (2017); 4.32 (2018).

### Financial soundness indicators (selected)
- Capital to risk-weighted assets: 17.5 (2010); 17.5 (2011); 17.5 (2012); 16.7 (2013); 16.6 (2012 repeated); 16.7 (2012 repeated); 16.8 (2013); 17.0 (2013).
- Nonperforming loans to total gross loans: 11.9 (2010); 14.9 (2011); 16.2 (2012); 16.9 (2012); 17.3 (2012); 16.6 (2013); 16.9 (2013); 17.1 (2013).
- Return on assets: 0.9 (2010); 0.8 (2011); 0.9 (2012); 0.8 (2012); 0.9 (2012); 0.7 (2013); 0.8 (2013); 0.8 (2013).
- Liquid assets to total assets: 20.9 (2010); 21.9 (2011); 22.1 (2012); 22.6 (2012); 22.4 (2012); 22.4 (2013); 23.2 (2013); 22.3 (2013).
- Customer deposits to total (non-interbank) loans: 87.8 (2010); 95.2 (2011); 97.0 (2012); 97.3 (2012); 99.4 (2012); 100.2 (2013); 102.9 (2013); 102.9 (2013).

### Social and demographic indicators (reference years)
- Per capita GNI (2011): US$ 6,550.
- Gini index (2007): 28.2.
- Poverty rate (2007): 10.6 percent.
- Primary education completion rate (2009): 95.5.
- Births per woman (2010): 1.5.
- Mortality under 5 (per 1,000) (2011): 12.1.
- Life expectancy at birth (2010): 73.5 years.
- Population annual change: -0.8 (2010); -2.4 (2011); -0.6 (2012); -0.5 (2013); -0.5 (2014); -0.5 (2015); -0.5 (2016); -0.5 (2017); -0.5 (2018).

*Source: IMF staff estimates and Bulgarian authorities as presented in the IMF country report tables.*

### Appendix I. External and Public Debt Sustainability Analyses

### Appendix I. External and Public Debt Sustainability Analyses

### External debt dynamics and recent developments
- External debt peaked at "108 percent of GDP at end-2009" and declined to "95 percent of GDP at end-2012" primarily due to private sector deleveraging.
- Bank external debt fell from "24 percent of GDP at end-2009" to "16 percent of GDP at end-2012".
- Excluding inter-company lending, external debt was "55 percent of GDP at end-2012", largely offset by international reserves.
- Rollover risks in the nonbank private sector are contained by moderate short-term exposure; such risks "did not materialize during the global financial crisis".

### Current account and financing counterpart
- The current account moved from a deficit of "25 percent of GDP in 2007" and "9 percent of GDP in 2009" to a projected surplus in 2013.
- Baseline medium-term balance of payments projections indicate the current account returns to deficit, financed mainly by foreign direct investment flows.
- Identified external debt-creating and related flow details (selected values from Table 1):
  - Baseline: External debt series (selected years) — "63.5", "58.1", "62.2", "66.7", "78.1", "94.3", "105.1", "108.3", "102.7", "94.1", "94.8", "92.7", "92.7", "87.3", "83.6", "77.0", "72.3".
  - Change in external debt (selected entries) — "-5.3", "4.1", "4.5", "11.5", "16.1", "10.8", "3.1", "-5.6", "-8.6", "0.7", "-2.1", "0.1", "-5.5", "-3.6", "-6.6", "-4.7".
  - Current account deficit, excluding interest payments (selected entries) — "3.3", "4.7", "9.9", "15.7", "23.0", "20.5", "7.0", "0.0", "-1.8", "-0.3", "-2.6", "-1.6", "-1.7", "-0.8", "-0.3", "0.3".
  - Exports (selected entries) — "50.2", "51.3", "55.2", "56.0", "61.2", "59.4", "58.1", "47.6", "57.1", "66.5", "66.7", "68.3", "70.2", "71.3", "72.1", "73.0", "74.0".
  - Imports (selected entry shown) — "61.5" (followed by series continuing in source).

### Projections, scenarios, and stress tests
- Baseline projections: gross external debt declines further and "reaches around 72 percent of GDP by 2018" primarily due to nominal GDP growth; nominal external debt falls by "3 percent from 2012 to 2018".
- Historical DSA scenario: the denominator effect is stronger because historical growth is higher than projected growth.
- Shocks to interest rate, growth rate, and current account deficit shift the external-debt-to-GDP trajectory upward, but even under these scenarios the highest level of external debt reached by 2017 is "86 percent of GDP".
- Gross external financing need (selected series from Table 1, in billions of US dollars): "3.5", "5.6", "11.5", "14.1", "24.0", "31.5", "28.0", "21.6", "19.6", "19.4", "15.7", "15.2", "16.4", "17.2", "18.6", "17.8".
- Key macroeconomic assumptions underlying the baseline (selected series):
  - Real GDP growth (selected entries): "5.5", "6.7", "6.4", "6.5", "6.4", "6.2", "-5.5", "0.4", "1.8", "0.8", "3.5", "4.1", "0.5", "1.6", "2.5", "3.0", "3.0", "3.0".
  - Nominal external interest rate (selected entries): "3.8", "3.4", "2.9", "3.3", "3.5", "3.1", "1.8", "1.3", "1.9", "1.8", "2.7", "0.9", "2.4", "2.7", "4.1", "3.8", "3.5", "3.1".
  - Growth of exports (US dollar terms, selected entries): "32.1", "31.6", "16.1", "25.3", "23.1", "20.9", "-23.6", "18.0", "30.6", "-4.5", "17.0", "17.8", "7.5", "4.4", "5.3", "5.6", "6.2", "6.2".
  - Growth of imports (US dollar terms, selected entries): "36.4", "32.1", "23.0", "26.4", "27.5", "22.8", "-33.8", "4.9", "24.3", "0.5", "16.4", "20.9", "3.4", "5.3", "5.9", "6.4", "6.8", "6.9".

### Public debt outlook, composition, and risks
- Public debt remains low and manageable: baseline public indebtedness is "around 20 percent of GDP".
- Alternative scenarios show the public debt ratio remains well contained; however, risks include unaccounted contingent liabilities and aging-related spending pressures following a reversal of pension reforms.
- Public sector DSA (selected figures from Table 2; all in percent of GDP unless otherwise indicated):
  - Nominal gross public debt (series): "28.6", "15.4", "17.6", "17.2", "21.1", "20.6", "20.9", "20.2", "19.0".
  - Public gross financing needs (series): "3.1", "3.1", "2.1", "5.2", "3.4", "4.6", "2.3", "3.9", "1.9".
  - Real GDP growth (series): "4.1", "1.8", "0.8", "0.5", "1.6", "2.5", "3.0", "3.0", "3.0".
  - Inflation (GDP deflator, series): "5.6", "4.9", "2.2", "1.1", "0.8", "1.8", "2.3", "2.5", "2.5".
  - Nominal GDP growth (series): "10.0", "6.8", "3.0", "1.6", "2.4", "4.3", "5.3", "5.6", "5.6".
  - Effective interest rate (in percent, series): "4.5", "5.2", "4.9", "6.4", "5.1", "4.6", "4.5", "4.5", "4.6".
- Contribution to change in gross public sector debt (selected entries):
  - Change in gross public sector debt (cumulative): "-6.0", "0.5", "2.2", "-0.4", "3.9", "-0.5", "0.4", "-0.8", "-1.2", "1.4".
  - Identified debt-creating flows (selected entries): "-6.9", "1.1", "0.3", "1.5", "1.5", "1.1", "0.1", "-0.3", "-0.2", "3.8".
  - Primary deficit (selected entries): "-1.8", "1.7", "0.1", "0.9", "1.3", "1.1", "0.3", "-0.1", "0.0", "3.5".
  - Automatic debt dynamics (selected entries): "-3.8", "-0.2", "0.3", "0.8", "0.5", "0.1", "-0.2", "-0.2", "-0.2", "0.8".
  - Net privatization proceeds (negative) (selected entries): "-1.3", "-0.3", "-0.1", "-0.2", "-0.2", "0.0", "0.0", "0.0", "0.0", "-0.4".
  - Residual, including asset changes (selected entries): "0.9", "-0.6", "1.9", "-2.0", "2.4", "-1.7", "0.3", "-0.5", "-1.0", "-2.5".
- Alternative public debt scenarios shown in Figure 2 (underlying assumptions, selected entries):
  - Baseline underlying assumptions (selected): Real GDP growth "0.5", "1.6", "2.5", "3.0", "3.0", "3.0"; Inflation "1.1", "0.8", "1.8", "2.3", "2.5", "2.5"; Primary Balance "-0.9", "-1.3", "-1.1", "-0.3", "0.1", "0.0"; Effective interest rate "6.4", "5.1", "4.6", "4.5", "4.5", "4.6".
  - Historical scenario (selected): Real GDP growth "0.5", "3.5", "3.5", "3.5", "3.5", "3.5"; Primary Balance "-0.9", "1.3", "1.3", "1.3", "1.3", "1.3"; Effective interest rate "6.4", "4.5", "5.9", "6.0", "7.0", "7.6".
  - Constant Primary Balance scenario (selected): Primary Balance constant at "-0.9" across projection years.

### Policy-relevant observations and risks
- External-debt reduction appears broadly durable under baseline projections driven by nominal GDP growth and contained debt-creating flows.
- Public debt is low (around "20 percent of GDP") and financing needs are modest, but fiscal risks include:
  - Unaccounted contingent liabilities.
  - Aging-related spending pressures following reversal of pension reforms.
- Continued fiscal discipline, growth-enhancing public spending, prudent financial regulation, adequate capital buffers, and improvements in the business climate are implied priorities to support stability and growth (policy context provided in related sections of the source).

*Source: Appendix I. External and Public Debt Sustainability Analyses, IMF staff report text provided.*

### 6.      The Bank’s Country Partnership Strategy (CPS) for Bulgaria, discussed by the Bank’s

### 6.      The Bank’s Country Partnership Strategy (CPS) for Bulgaria, discussed by the Bank’s

### Bank CPS and strategic pillars
- The 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 the National Reform Program to implement Europe 2020 Strategy,
  - (ii) strategies and institutions to accelerate EU funds absorption, and
  - (iii) complementing EU financing.

### World Bank active portfolio and historical lending
- As of November 2013, the active Bank portfolio in Bulgaria consists of 3 operations at the original loan amount of US$230.5 million 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$1,123 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, 43 have been completed (of which 13 have been fully or partially cancelled during implementation), and 3 operations are currently under implementation.

### Active World Bank operations (Net of Cancellations) — key entries
- Operation 1: Second Trade and Transport Facilitation in Southeast Europe (TTFSE 2) — US$50.9 million — Board date 2007
- Operation 2: Social Inclusion Project — US$59.0 million — Board date 2008
- Operation 3: Municipal Infrastructure Development Project — US$118.7 million — Board date 2009

### Economic and Sector Work (recent analytical focus and advisory services)
- Recent World Bank country diagnostic work (last two years) focuses on:
  - assessing the economic and fiscal impact of an aging population;
  - governance, quality assurance and financing of higher education;
  - health sector reform;
  - programmatic crisis monitoring;
  - administrative barriers to private sector growth.
- Recently completed analytical work includes:
  - Mitigating the Economic Impact of an Aging Population,
  - Power Sector Rapid Assessment,
  - Health Sector Diagnosis,
  - Strengthening Higher Education,
  - Administrative Barriers to Businesses at Municipal Level,
  - Alternative Dispute Resolution for Financial Services.
- Reimbursable advisory service (RAS) agreements:
  - Three RAS agreements signed in 2012 focusing on water supply and sanitation, innovation, and roads.
  - RAS agreements in the field of health and irrigation are under preparation.

### IFC activities and investments as of November, 2013
- IFC had 37 projects (completed and ongoing) in Bulgaria with total commitments of over US$895 million.
- Notable IFC involvements:
  - Largest IFC investment: loan for the 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.
  - Financial sector support: two specialized SME banks; established Bulgaria’s first micro-lending bank; invested in a venture fund targeting the SME sector.
  - Manufacturing support: modernization and expansion of an electronics producer, a large steel mill, and two glass processing plants.
- Environmental components:
  - A manufacturing plant purchasing equipment to reduce GHG emissions.
  - Electronics producing company making sensors for cars that monitor emission of polluting gases and improve fuel efficiency.

### Contact points for World Bank activities in Bulgaria
- Questions may be referred to:
  - Ms. Stella Ilieva (3592–9697–251)
  - Ms. Sylvia Stoynova (3592–9697–220)

### Statistical issues — overview
- Data provision is adequate for surveillance purposes.
- Bulgaria participates in the SDDS since 2003.

### Real sector statistics — compilation and dissemination
- The National Statistical Institute (NSI) responsibilities and methods:
  - Compiles national accounts based on SNA 1993 and the European System of Accounts 1995.
  - GDP data by activity and expenditure categories compiled and reconciled within an annual supply and use framework.
  - Government output and final consumption estimated on an accrual basis.
  - Published national accounts include current and capital accounts for five main domestic sectors: general government and its sub-sectors, financial corporations, non-financial corporations, nonprofit institutions serving households, and households.
  - INS publishes financial accounts and balance sheets by institutional sectors and sub-sectors on an annual basis.
- Quarterly GDP:
  - NSI has compiled estimates of quarterly GDP by the production and expenditure approaches in current and constant prices since 1994.
  - Preliminary flash estimates of GDP and its components by production and expenditure side are produced and disseminated 42–44 days after the reference period.
  - Quarterly updates are disseminated 65 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.
  - Recent IMF TA advised on improving the seasonal adjustment procedure of quarterly GDP and volume measures of taxes on products.
- Price indices:
  - NSI produces CPI (domestic), HICP (Harmonized CPI per Eurostat methods), and PPI; all updated monthly.
  - CPI series begins in 1995, PPI in 2000, HICP in 2005 (for earlier years it is set equal to the CPI).
  - Consumer price indices exclude owner-occupied housing and health and life insurance; financial services included since 2004.
  - Work has started on inclusion of owner-occupied housing in the HICP under a Eurostat project.
  - Geographical coverage: 27 urban areas that account for an estimated 65 percent of sales.
- Foreign trade and customs data:
  - Flow of customs data has improved significantly; 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.
  - Monthly NSI contact with BNB to review data issues and ensure consistency between NSI export and import data and balance of payments data.
- Employment and wages:
  - National accounts employment and hours worked compiled from Labor Force Survey and enterprise surveys (“Quarterly survey on employees, hours worked, wages and salaries, and other expenditures paid by the employers” and “Annual enterprises survey on employment, wages and salaries, and other labor cost”), adjusted according to ESA95 methodology.
  - Current monthly and quarterly estimates based on quarterly sample survey of establishments – QLCS; QLCS sample includes 13000 private sector enterprises out of approximately 223000.
  - Public sector enterprises covered exhaustively except schools and kindergartens (from 2008 a sample is drawn).
  - Household labor force survey is an alternative source; methodological discrepancies between household and establishment surveys need to be taken into account (especially regarding agricultural employment).
  - Since the beginning of 2003 a quarterly Labour force survey, providing average quarterly results, is implemented.
  - NSI compiles and publishes quarterly wage data for various economic sectors.
  - Main shortcomings in wage data:
    - (i) under-reporting of private sector wages;
    - (ii) reporting of average gross earnings only and not wages by occupation.
  - Since 2002, a Structure of Earnings Survey (SES) is conducted every four years providing information about average monthly and hourly earnings by economic activity, occupation, gender and education.
  - Household budget survey provides an alternative source of data for private sector wages.
- Population census:
  - A Population Census was conducted in early 2011 and is a source for redesigning household surveys, particularly the household budget survey and the labor force survey.

### Government finance statistics
- Progress and practices:
  - Following recommendations of a combined STA/FAD mission and within EU accession fiscal reporting requirements, significant progress on 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 for the whole general government are reported for publication in IFS, through Eurostat.
  - Major part of GFS data is compiled by NSI; transmissions to Eurostat are carried out by NSI.
  - 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.
- MOF budget execution data:
  - MOF 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 financing (in national formats) are published in the monthly bulletin and posted on the MOF’s website, in addition to the GFSM 2001 data.
  - Progress made in presenting disaggregated data, including expenditure by functional classification.
  - A full economic classification of expenditure is now available, and the authorities have provided such data on an annual basis back to 1998.

### Money and banking statistics
- The BNB reports monetary data for publication in IFS based on the ECB framework for the collection and compilation of monetary data.

### Balance of payments statistics
- Bulgaria provides quarterly balance of payments (BOP) statistics for dissemination in IFS on a timely basis.
- Yearly BOP data are disseminated in the Balance of Payments Statistics Yearbook up to 2012.
- The BNB derives other sectors’ investment income data on reinvested earnings (debit) from:
  - annual direct investment surveys of the NSI,
  - quarterly surveys of the largest foreign-owned enterprises for preliminary estimates.
- Since 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 for imports and exports of goods with non-EU member states are based on SAD (Single Administrative Document) collected by Customs Agency.
  - Movement of goods within the EU is based on Intrastat declarations collected by the National Revenue Agency.

*International Monetary Fund staff summary based on the source content.*

### 12.      Bulgaria is subject to the statistical requirements and reporting standards of Eurostat

### _cr1423 - 12.      Bulgaria is subject to the statistical requirements and reporting standards of Eurostat

### Statistical reporting and dissemination
- Bulgaria is subject to the statistical requirements and reporting standards of Eurostat and the European Central Bank (ECB).
- Bulgaria subscribes to the Special Data Dissemination Standard (SDDS) since 2003; relevant metadata have been posted on the Dissemination Standards Bulletin Board.
- A data ROSC was published in December 2003.
- The latest (2012) annual observation report for Bulgaria is posted on the Fund’s website: http://dsbb.imf.org/images/pdfs/AnnualReports/2012/BGR_SDDS_AR2012.pdf
- Table of Common Indicators Required for Surveillance (as of December 4, 2013) presents frequencies and dates of latest observation/receipt for key series (examples shown in the source: Exchange Rates 11/29/2013; International Reserve Assets and Reserve Liabilities October 2013 received 11/21/2013; CPI October 2013 received 11/12/2013; GDP 2013 Q3 received 12/4/2013; Gross External Debt September 2013 received 11/25/2013; International Investment Position 2013 Q2 received 09/30/2013).

### Macroeconomic outlook and recent developments
- Real GDP growth projections and estimates:
  - Real GDP growth estimated at about 0.5 percent in 2013.
  - Projected to rise to about 1.6 percent in 2014.
  - Table: Real GDP -5.5 (2009), 0.4 (2010), 1.8 (2011), 0.8 (2012), 0.5 (2013 Est.), 1.6 (2014 Proj.).
- Domestic demand and external sector:
  - Domestic demand weakened in 2013; exports performed well.
  - Q3 2013 GDP dynamics suggested acceleration to 1.5 percent (quarter) compared with EU average growth of 0.3 percent in the same period.
  - Exports up by 9.6 percent (Q3 2013), imports up by 8.6 percent (Q3 2013); net exports contributed positively.
  - Current account: surplus in 2013; current account recorded a surplus of more than €1.1 billion in January–October (2.8 percent of GDP).
  - Cumulative trade deficit narrowed by 39.5 percent (yoy) in January–October.
  - Current and capital account positive, amounting to €1.43 billion (January–October 2013).
  - International reserves reached €14.4 billion at end-2013, covering more than 7 months of imports.
- Prices and labor market:
  - Inflation projected to rise from 0.4 percent in 2013 to 0.8 percent in 2014.
  - Consumer price index (HICP, average): 2.5 (2009), 3.0 (2010), 3.4 (2011), 2.4 (2012), 0.4 (2013 Est.), 0.8 (2014 Proj.).
  - CPI (end of period): 1.6 (2009), 4.4 (2010), 2.0 (2011), 2.8 (2012), -0.5 (2013).
  - Employment: -3.1 (2009), -6.1 (2010), -2.8 (2011), -1.1 (2012), 0.1 (2013 Est.), 0.8 (2014 Proj.).
  - Unemployment rate (percent of labor force): 6.9 (2009), 10.3 (2010), 11.3 (2011), 12.4 (2012), 12.4 (2013 Est.), 11.9 (2014 Proj.).
  - Labor productivity: stepped up by 1.6 percent yoy in real terms in Q3 (2013); industrial productivity up by 4 percent (yoy) in Q3 (2013).
  - Seasonally adjusted unemployment rate marginally decreased in Q3; level remained unchanged in November at 12.9 percent.
- Monetary and external indicators from the table:
  - Broad money (M3): 4.2 (2009), 6.4 (2010), 12.2 (2011), 8.4 (2012), 8.7 (2013 Est.), 5.9 (2014 Proj.).
  - Domestic private credit: 3.8 (2009), 1.3 (2010), 3.8 (2011), 2.8 (2012), 0.3 (2013 Est.), 3.6 (2014 Proj.).
  - Current account balance (percent of GDP): -8.9 (2009), -1.5 (2010), 0.1 (2011), -1.3 (2012), 0.4 (2013 Est.), -0.9 (2014 Proj.).
  - International investment position: -102 (2009), -95 (2010), -86 (2011), -81 (2012), -79 (2013 Est.), -78 (2014 Proj.).
  - Gross external debt: 108 (2009), 103 (2010), 94 (2011), 95 (2012), 93 (2013 Est.), 93 (2014 Proj.).
  - Gross official reserves: 37 (2009), 36 (2010), 35 (2011), 39 (2012), 36 (2013 Est.), 39 (2014 Proj.).
  - Leva per euro: Currency board peg to euro at lev 1.95583 per euro.
  - Per capita GNI (2011): US$ 6,550; Gini index (2007): 28.2; poverty rate (2007): 10.6 percent.

### Fiscal stance and sustainability
- Fiscal performance and targets:
  - Fiscal deficit fell to 0.5 percent of GDP in 2012.
  - General government finances (percent of GDP) — selected series from table:
    - Revenue: 35.3 (2009), 32.7 (2010), 32.4 (2011), 34.2 (2012), 36.3 (2013 Est.), 36.5 (2014 Proj.).
    - Expenditure: 36.2 (2009), 36.7 (2010), 34.4 (2011), 34.6 (2012), 38.3 (2013 Est.), 38.3 (2014 Proj.).
    - Balance (net lending/borrowing on cash basis): -0.9 (2009), -4.0 (2010), -2.0 (2011), -0.5 (2012), -2.0 (2013 Est.), -1.8 (2014 Proj.).
    - Gross public debt: 15.6 (2009), 14.9 (2010), 15.4 (2011), 17.6 (2012), 17.5 (2013 Est.), 21.2 (2014 Proj.).
  - 2013 fiscal adjustments and measures:
    - Caretaker government passed a social assistance package of 0.05 percent of GDP in April 2013.
    - New government passed an additional social assistance package of 0.03 percent of GDP in June 2013.
    - Parliament revised the 2013 Budget Law in August 2013 providing an additional fiscal impulse of 0.7 percent of GDP; fiscal deficit set to reach 2.0 percent of GDP for 2013.
  - 2014 budget:
    - Envisages a deficit of 1.8 percent of GDP.
    - Projects a further decline to a deficit of 1.1 percent of GDP by 2016.
    - Structural deficit in 2016 expected to be reduced to 1 percent of GDP, in line with the MTO.
    - New special purpose investment fund envisaged at 0.6 percent of GDP for capital spending in small municipalities.
- Fiscal policy guidance and practices:
  - Authorities remain committed to observing national fiscal rules and the Fiscal Compact.
  - Debt issuance prioritized in domestic currency and at fixed interest rates per the Government Debt Management Strategy for 2012–2014.
  - More stringent limits set on public sector enterprises and municipalities for new contingent liabilities.
  - Strengthened management of public enterprises and work on more transparent frameworks for appointments and performance monitoring.
  - Authorities working on regulations to extend coverage of targeted social assistance and implement more flexible eligibility thresholds.

### Financial sector and banking system
- Systemic position and indicators:
  - Financial system characterized as stable, well capitalized, and liquid; profitability is low.
  - Nonperforming loans (NPLs) amounted to 17.2 percent of loans in September (2013).
  - Coverage by provisions for NPLs is 72.7 percent.
  - Reduction in banks’ foreign liabilities has been gradual; plentiful bank liquidity resulted in a positive net foreign asset position for the first time since 2006.
- Supervisory approach and policy:
  - BNB committed to maintain capital and liquidity buffers during implementation of the CRD IV framework.
  - Opportunities under pillar 2 of the Basel Accord to be explored; maximum capital conservation and systemic capital buffers to be imposed on all banks.
  - NPLs reported conservatively and covered with an additionally created capital buffer.
  - Authorities focus on good provisioning of NPLs and acknowledge banks’ inclination to a “wait and see approach”.
  - BNB will encourage a steady but gradual process of reducing distressed assets and releasing associated collateral to avoid unduly disturbing markets.
  - Authorities do not intend to participate in the close cooperation framework of the Single Supervisory Mechanism, citing absence of liquidity and solvency support and lack of voting rights in the ECB Governing Council for non-euro area participants; however, Bulgaria remains fully engaged in financial sector reform at the European level.
- Policy recommendation from Directors:
  - Encourage further steps to reduce NPLs through asset disposal to reduce asset price uncertainty and support future investment.
  - Preserve conservative supervisory approach under the new European framework.

### Structural challenges and reform priorities
- Structural constraints identified:
  - Bulgaria ranks favorably on macro-policy outcomes and income tax competitiveness, but ranks much lower on enforcing contracts, resolving insolvencies, and red tape.
  - Judicial system viewed as problematic; corruption and cronyism seen as widespread.
  - These shortcomings are impediments to unlocking growth potential and accelerating income convergence with the EU.
- Policy recommendations and government actions:
  - Directors emphasized need for bold structural reforms to lift growth, create jobs, and enhance productivity.
  - Policy focus areas: improve business climate, judicial system, anti-corruption and anti-monopoly regimes, active labor market policies, improvements in education and training, and efficient absorption of EU funds.
  - Authorities’ near-term plan three pillars:
    1. Increased attention to social issues — better targeting and increased efficiency of social spending to reduce poverty and social exclusion.
    2. Further reduction of external and fiscal vulnerabilities through internal restructuring of the budget without deviating from the medium-term structural deficit target.
    3. Maintain conservative bank supervision while implementing the CRD IV framework.
  - Structural measures underway:
    - New National Strategy for Lifelong Education adopted at the beginning of 2014.
    - Implementation of pension reforms postponed for one year but not reversed; authorities enhanced cooperation with stakeholders to reach agreement in 2014 on an augmented package to overturn the long-run pension deficit.
    - Concise amendments adopted to increase efficiency of active labor market policies at national and regional levels.
    - Establishment of a special purpose investment fund with competitive bidding under Council of Ministers control for small municipalities (0.6 percent of GDP).

### Executive Board and authorities’ assessments
- Executive Board assessment highlights:
  - Directors commended authorities for maintaining macroeconomic and financial stability despite external and internal challenges.
  - Emphasized complementing prudent policies with decisive structural reforms to boost growth, job creation, and income convergence.
  - Supported the 2014 budget’s structural fiscal stance; urged maintenance of credibility under the currency board by observing national and EU deficit rules.
  - Recommended rebuilding fiscal buffers over time by targeting a balanced structural budget and preparedness to adjust spending if revenues fall short.
  - Encouraged improved targeting and efficiency of social spending (including healthcare), reinstatement of needed pension reforms, and addressing risks in some state-owned enterprises.
  - Urged continued efforts to ensure rapid and efficient absorption of EU funds.
- Authorities’ statement (Menno Snel, Tsvetan Manchev highlights):
  - Authorities committed to prudent macroeconomic policies and attentive to Fund advice.
  - Currency Board Arrangement remains cornerstone of domestic policymaking.
  - Authorities emphasize conservative bank supervision, fiscal responsibility, and renewed impetus for structural reforms to strengthen public confidence and EU fund utilization.

*International Monetary Fund — Selected content from _cr1423 (January 24, 2014) — Bulgaria: Article IV consultation materials and staff/authorities statements*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1423.pdf_