## _cr15119

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### Macroeconomic context and outlook
- 2014 developments:
  - Economy: modest expansion led by domestic demand; export-driven recovery in 2013 proved short-lived.
  - Inflation: headline and core consumer prices both declined by an average 1.6 percent in 2014.
  - External: current account registered a small surplus in 2014; external debt increased slightly to about 90 percent of GDP.
- Selected indicators (as presented):
  - Real GDP (percent change): 1.1 1.7 1.2 1.5 1.8 2.0 2.3 2.5
  - Unemployment rate (ILO, percent): 13.0 11.5 10.9 10.3 9.7 9.2 8.6 8.1
  - Annual average headline HICP inflation (percent): 0.4 -1.6 -1.0 0.6 1.2 1.8 2.1 2.1
  - Current account balance (percent of GDP): 2.3 0.0 0.2 -0.8 -1.1 -1.4 -1.7 -2.0
  - Output gap: -1.6 -1.4 -1.6 -1.5 -1.1 -0.5 0.0 0.0
- Staff projections and views:
  - 2015 real GDP projected to expand by 1¼ percent.
  - Medium term: growth gradually reaches 2½ percent; unemployment declines to about 8 percent; inflation turns positive late in 2015; external debt slowly declines below 80 percent of GDP.
  - Downside: corporate debt overhang and high NPLs weigh on private investment; net exports limited by subdued regional growth.

### Risks and vulnerabilities
- Risk Assessment Matrix (excerpt, as of March 12, 2015):
  - High likelihood / High impact: Inadequate implementation of structural reforms; protracted slower European growth and deflation.
  - Medium likelihood / High impact: Incomplete implementation of fiscal consolidation.
  - Medium likelihood / High impact (short term): Inadequate actions to address banking system weaknesses.
  - High likelihood / Medium impact: NPLs leave asset price uncertainty.
  - High likelihood / Medium impact: Financial stress in emerging markets and/or the euro area re-emerges.
  - Medium likelihood / Medium impact: Intensification of geo-political tensions related to Russia and Ukraine.
- Specific external vulnerability: Greek banks’ affiliates in Bulgaria account for nearly 25 percent of total banking assets; since 2009 they have rebalanced funding toward local depositors.

### Fiscal developments, FRA, and debt dynamics
- 2014 fiscal outcomes and drivers:
  - Fiscal deficit rose to 3.7 percent of GDP in 2014 (cash basis), twice the original budget target.
  - Reasons: revenue shortfalls, lower grants, unprogrammed health-related expenditures, interrupted EU reimbursements; banking sector emergency support costs recorded below the line.
  - Public debt increased 9 percentage points to 27 percent of GDP at end-2014; included a EUR 1.5 billion (3.6 percent of GDP) loan for state banking sector support.
  - Fiscal reserve (FRA) stood at BGN 8.1 billion on a cash basis at end-2014.
- 2015 financing:
  - On March 20, 2015 Bulgaria placed triple-tranche Eurobonds for €3.1 billion (7.4 percent of GDP), covering the bulk of 2015 financing needs.
- 2015 budget and medium-term plans:
  - 2015 budget targets a 3 percent of GDP headline deficit (cash basis), above the national rule and above the 1.5 percent target in the 2014 Convergence Program.
  - Structural deficit reduction on a cash basis by about 0.8 percent of potential GDP versus 2014; further headline deficit reductions of 0.5 percent of GDP in each of 2016 and 2017 programmed.
- Staff fiscal recommendations:
  - Consider faster consolidation than currently planned to rebuild buffers and restore credibility.
  - 2015: 3 percent deficit target is achievable; expenditure restraint critical; save any revenue over-performance.
  - Medium term: target a structural balance by 2019 through an average adjustment of 0.75 percent of GDP per year.
  - Concrete plans needed to address long-term pressures from aging population and contingent liabilities from SOEs; enhance disclosure of fiscal risks and establish an independent fiscal council.
- Debt sustainability and projections (Appendix III highlights):
  - Gross external debt: about 90 percent of GDP at end-2014; under staff baseline projected to be under 80 percent of GDP by 2019.
  - Public debt increased significantly in 2014; under baseline not sufficient to put debt firmly on a downward path if FRA balances remain at projected 2015 level.
  - A combined macro-fiscal shock would bring the debt ratio above 40 percent by 2017.

### Fiscal Reserve Account (FRA) — composition, trends, and projections
- FRA purposes: fiscal reserve deposits and account receivables from EU funds for certified expenditures; also covers operational needs and balances of extra-budgetary funds and autonomous institutions.
- FRA levels and trends:
  - Declined to BGN 4.7 billion at end-2013 (statutory end-year limit BGN 4.5 billion).
  - Increased sharply to BGN 9.2 billion by end-2014.
  - FRA excluding account receivables from EU funds: BGN 8.1 billion at end-2014.
  - FRA includes deposits related to liquidity support to FIB for BGR 0.9 billion, reducing freely available emergency resources.
- FRA composition (as of end-2014) — percentages:
  - Silver Fund: 27%
  - Deposits of central budget at BNB: 23%
  - Deposits of central budget at banks: 14%
  - Deposits related to EU funds: 15%
  - Deposits of extrabudgetary funds/autonomous entities at BNB: 9%
  - Deposits of extrabudgetary funds/autonomous entities at banks: 1%
  - Account receivables from EU funds: 11%

### Banking sector stress, KTB failure, and system indicators
- System resilience and metrics (2014Q4, excluding KTB where noted):
  - Aggregate CT1 and total capital ratios: 20 and 22 percent, respectively.
  - System-wide NPLs: 16.7 percent (9.5 percent, net of reported provisions).
  - NPL coverage: 58.4 percent.
  - Credit growth: 1 percent on an annual basis (adjusted for KTB).
  - Corporate debt accounts for over 55 percent of banks’ domestic loans.
- Corporate Commercial Bank (KTB) failure chronology and figures:
  - KTB placed under conservatorship on June 20, 2014 after a massive deposit run; lost BGN 1.2 billion (~20 percent of its deposits) within days.
  - Audit results (published October 22) identified impairment deviations of about BGN 4.22 billion; BGN 3.4 billion (64 percent of KTB total loan portfolio) were loans to newly created investment companies lacking necessary credit risk information.
  - After recognizing impairments, KTB showed negative capital of about BGN 3.75 billion.
  - BNB revoked KTB’s license on November 6; liquidation was the only option under existing legislation.
- Immediate policy response and resolution actions:
  - Liquidity assistance scheme of up to BGN 3.3 billion (4 percent of GDP) established on June 29 to provide 5-month state deposits at market conditions; FIB received BGN 1.2 billion under the scheme.
  - BDIF had BGN 1.8 billion available; funding gap estimated at approximately BGN 1.7 billion at end-October.
  - Government approved a loan to BDIF of up to BGN 2 billion (maturity up to 5.5 years at fixed 2.95 percent) to cover the gap.
  - BDIF payout began December 4 for up to BGN 196,000 (EUR 100,000) per depositor through selected servicing banks.
  - CBV (KTB subsidiary) was authorized to resume banking activity and restart servicing depositors without restrictions on December 12; special supervision expired December 23.
- Supervisory weaknesses revealed:
  - Poor credit underwriting, related-party lending, and failures to identify nonperforming assets and provisions under IFRS by supervisors and auditors.
  - Legal framework gaps for bank resolution delayed action; timely transposition of the EU Bank Recovery and Resolution Directive (BRRD) into national law by this summer recommended.

### NPLs, balance-sheet repair, and recommended comprehensive strategy
- NPL metrics and concerns:
  - System-wide NPLs at 16.7 percent (9.5 percent net of provisions); high corporate debt overhang noted.
- Staff recommendations and actions:
  - BNB to ensure proper identification of NPLs and promote effective write-offs and disposal of encumbered collateral.
  - Conduct the planned Asset Quality Review (AQR) with clear timetable and transparent modalities; use AQR as input to a comprehensive risk and vulnerability assessment under IMF–World Bank FSAP.
  - Consider specific provisioning guidelines (as done in other countries).
  - Systematic review of banks’ debt recovery and restructuring processes, possibly with external workout specialists.
  - Complementary government initiatives: guidelines for voluntary out-of-court debt workouts; measures to address judicial bottlenecks for timely insolvency proceedings.
  - Vienna Initiative engagement for regional NPL management.
  - Improve availability and ready access to more bank-level data.
  - Strengthen supervisory accountability, enforcement policy, and increase sanctions across oversight framework.
  - Assess recapitalization needs of BDIF and prepare contingency plans for bank recapitalization if needed.

### Financial safety-net and institutional reforms
- Recommendations to strengthen oversight and crisis-management:
  - Complete the joint IMF/World Bank Basel Core Principles (BCP) Assessment (expected midyear).
  - Undertake an independent review by external banking experts of past supervisory activity to learn from KTB.
  - Consider independent expert review of Financial Supervision Commission’s (FSC) framework.
  - Strengthen BNB/FSC powers to investigate related-party lending; adopt formal enforcement policy linking findings to remedial actions.
  - Timely transposition of BRRD into national law and harmonize BDIF law with BRRD implementation.
  - Consider compensation arrangements for FSC to acquire and retain expertise; World Bank TA ongoing for BDIF/IADI core principles assessment.

### Electricity sector risks (Box 2)
- NEK financial pressures and indicators:
  - BEH issued bonds for EUR 500 million in October 2013 and on-lent proceeds to NEK; NEK continued to miss obligations.
  - Three reductions in electricity tariff rates in 2013 worsened NEK’s finances in 2014.
  - Loss write-offs consumed more than half of NEK’s equity since 2013Q3.
  - Short-term liabilities to suppliers reached BGN 1.7 billion as of September 2014.
  - NEK reported total debt of more than Lev 3.2 billion (4 percent of GDP) as of September 2014.
  - Leverage: debt to equity ratio of 174 percent; current assets covered only half of short-term liabilities.
- Impacts and risks:
  - Short-term liabilities endangered upstream enterprises (generators, renewable producers, CHP/district heating).
  - NEK delayed or scaled back maintenance and investments.
  - Given state ownership, sizable contingent liabilities to public finances could materialize if NEK cannot service debt.

### Reserve adequacy and external assessment
- Reserve metrics (Appendix II):
  - ARA composite metric: reserve coverage rose from about 120 percent at end-2013 to an estimated 130 percent at end-2014.
  - As of end-2014, reserves estimated to cover over six months of 2015 projected imports.
  - Ratio of international reserves to monetary base remained above 150 percent as of end-2014.
  - Reserve coverage of broad money improved slightly in 2014 to nearly 50 percent.

### Structural reforms, governance, and policy priorities
- Structural gaps and governance challenges:
  - Bulgaria remains the poorest EU member with income less than half the EU average; slow convergence, high structural unemployment, and regional disparities persist.
  - Longstanding governance issues: corruption (2014 Corruption Perception Index ranked Bulgaria among lowest in EU), weak institutions, ineffective judiciary.
  - Energy sector inefficiencies: NEK’s reported debt around 4 percent of GDP; cross-sector subsidies obscure contingent fiscal liabilities.
- Staff reform recommendations:
  - Jump-start structural reform agenda: address institutional weaknesses, strengthen human capital, fix infrastructure gaps, and improve business environment.
  - Improve rule of law, reduce corruption and cronyism, and demonstrate reform momentum.
  - Active labor market policies and education/training improvements to reduce rigidities.
  - Urgent comprehensive energy sector strategy: strengthen regulatory independence, reduce output share of inefficient plants, renegotiate long-term purchase agreements, phase rationalization of electricity prices while protecting the poor, and enhance governance of major energy SOEs.
- Authorities’ commitments and measures:
  - Currency Board Arrangement remains cornerstone of policy.
  - March 2015: €3.1 billion Eurobond issued.
  - April 2015: New Law on the Fiscal Council adopted for an independent consultative Fiscal Council to Parliament.
  - National Reform Program update and energy regulator appointments progressing; plans for AQR, stress tests, BRRD transposition, and BDIF recapitalization noted.

### IMF Executive Board and mission appraisal
- Executive Board concluded the 2015 Article IV consultation on May 4, 2015 (Press Release No. 15/215, May 13, 2015).
- Board priorities echoed staff recommendations:
  - Rebuild fiscal and financial buffers; decisive actions to close gaps in financial-sector oversight; implement resolution framework reforms; recapitalize deposit insurance fund; initiate AQR; comprehensive strategy for NPLs and private-sector deleveraging; consider more ambitious medium-term consolidation; advance structural reforms to boost investment, productivity, and governance.
- Institutional recommendation: next Article IV consultation with Bulgaria to be held on the standard 12-month cycle.

*Source: IMF staff report text from the Bulgaria Article IV consultation (excerpts provided).*

### 1. Fiscal Reserve Account and Fiscal Buffers ______________________________________________________ 19

### 1. Fiscal Reserve Account and Fiscal Buffers

### Context: policy credibility and economic stability at risk
- Bulgaria’s reputation for macro-financial stability came under scrutiny in 2014 following a severe test to the banking system and a sharp deterioration in the fiscal stance.
- Political turbulence and unaddressed governance issues increased strain on the economic outlook, prompting S&P to downgrade Bulgaria’s credit rating to below investment grade and triggering the EC’s February 2015 decision to step up the macroeconomic imbalances procedure for Bulgaria.
- Urgent policy action is needed to rebuild buffers and anchor medium-term convergence under the currency board arrangement.

### Economic developments and outlook
- 2014: economy expanded modestly, led by domestic demand; export-driven recovery in 2013 proved short-lived.
- Deflationary pressures continued: headline and core consumer prices both declined by an average 1.6 percent in 2014.
- External sector: current account registered a small surplus in 2014; external debt increased slightly to about 90 percent of GDP; reserves remain comfortable (Appendix II).
- Selected macro indicators as presented:
  - Real GDP (percent change)1.11.71.21.51.82.02.32.5
  - Unemployment rate (ILO, percent)13.011.510.910.39.79.28.68.1
  - Annual average headline HICP inflation (percent)0.4-1.6-1.00.61.21.82.12.1
  - Current account balance (percent of GDP)2.30.00.2-0.8-1.1-1.4-1.7-2.0
  - Output gap-1.6-1.4-1.6-1.5-1.1-0.50.00.0

### Staff’s baseline projections and views
- 2015 growth projection:
  - For 2015, real GDP is projected to expand by 1¼ percent, supported by modest private consumption growth and high EU funds absorption.
- Medium-term projection:
  - Growth gradually reaches only 2½ percent; unemployment declines to about 8 percent; inflation turns positive late in 2015 but remains subdued; a small current account deficit is projected into the medium term; external debt slowly declines below 80 percent of GDP (Appendix III).
- Outlook caveats:
  - Corporate debt overhang and high NPLs will weigh on private investment; net exports’ contribution limited by subdued regional growth.

### Risk assessment (summarized)
- Key risks identified (excerpted from the Risk Assessment Matrix, as of March 12, 2015):
  1. Inadequate implementation of structural reforms to raise productivity and mitigate emigration and aging (short/medium term). Relative Likelihood: High. Impact if Realized: High.
  2. Incomplete implementation of fiscal consolidation (short/medium term). Relative Likelihood: Medium. Impact if Realized: High.
  3. Inadequate actions to address weaknesses in the banking system (short term). Relative Likelihood: Medium. Impact if Realized: High.
  4. NPLs leave asset price uncertainty (short/medium term). Relative Likelihood: High. Impact if Realized: Medium.
  5. Protracted period of slower European growth and deflation (short/medium term). Relative Likelihood: High. Impact if Realized: High.
  6. Financial stress in emerging markets and/or the euro area re-emerges (short term). Relative Likelihood: High. Impact if Realized: Medium.
  7. Intensification of geo-political tensions related to Russia and Ukraine. Relative Likelihood: Medium. Impact if Realized: Medium.
- Specific external vulnerability noted: Greek banks’ affiliates in Bulgaria account for nearly 25 percent of total banking assets; since 2009 they have rebalanced funding toward local depositors, reducing foreign banking exposure to parent banks.

### Authorities’ views
- Authorities broadly agreed with staff’s outlook; budget growth projections were more conservative than staff’s.
- They emphasized commitment to the announced fiscal plan, steps to reinforce confidence in the financial sector, and broader structural reforms.
- Authorities noted mitigating factors: reduced domestic political uncertainty, favorable external market conditions, and successful Eurobond issuance in March meeting 2015 external financing needs.

### Policy discussions: safeguarding financial sector stability

Background and system indicators
- The failure of Corporate Commercial Bank (KTB) in 2014 exposed shortcomings in supervision and crisis management, and highlighted fiscal-financial linkages under the currency board.
- System resilience: strong system liquidity, state liquidity support schemes (BNB and government), and injection of state funds into the deposit insurance fund (BDIF) helped calm depositors and allowed payment of KTB insured deposits in December.
- Banking system metrics (as of 2014Q4, excluding KTB where noted):
  - Aggregate CT1 and total capital ratios: 20 and 22 percent, respectively.
  - System-wide NPLs: 16.7 percent (9.5 percent, net of reported provisions).
  - NPL coverage: 58.4 percent.
  - Credit growth: 1 percent on an annual basis (adjusted for KTB).
  - Corporate debt accounts for over 55 percent of banks’ domestic loans.
- KTB failure revealed weaknesses: poor credit underwriting, related-party lending, adherence to IFRS for nonperforming assets and provisions not identified by supervisors or auditors; legal framework for bank resolution had gaps causing delays.

Staff’s recommendations and priority actions
- Strengthen supervisory credibility and crisis-management tools; ensure clear leadership at BNB with mandate to support a strong, independent, and accountable central bank.
- Improving supervision:
  - Complete the joint IMF/World Bank Basel Core Principles (BCP) Assessment (expected midyear).
  - Undertake a candid, in-depth, independent review by external banking experts of past supervisory activity to strengthen processes and learn from KTB.
  - Consider an independent expert review of the Financial Supervision Commission’s (FSC) supervisory framework.
- Strengthen system-wide accountability:
  - Develop concrete plans by the Commission of Public Oversight of Statutory Auditors to enhance oversight and accountability of external statutory auditors.
  - Consider strengthening BNB/FSC supervisory powers to investigate related-party lending.
  - Adopt a formal enforcement policy linking supervisory findings to remedial actions and procedures for exceptions.
  - Consider significant increases in sanctions across the oversight framework to enhance deterrence.
- Strengthen the resolution framework:
  - Timely transposition of the EU Bank Recovery and Resolution Directive (BRRD) into national law by this summer is critical to fill resolution and crisis-management gaps.
- Ensure an adequate financial safety net:
  - Revise BDIF law to address gaps revealed by the KTB situation, including facilitating timelier payout of insured deposits; harmonize BDIF law with the BRRD implementation.
  - Authorities intend to promptly recapitalize the BDIF following the payout of insured KTB deposits.
- Assess banks and repair balance sheets:
  - Conduct the planned Asset Quality Review (AQR) with a clear timetable and transparent, arms-length modalities.
  - Develop a well-defined communication strategy and contingency plans in case recapitalization needs materialize.
  - Use the AQR as input to a comprehensive risk and vulnerability assessment under the IMF–World Bank Financial Sector Assessment Program.
- Enhance access to information:
  - Improve availability and ready access to more bank-level data to facilitate analysis and reduce uncertainty.
- Additional measures:
  - Consider compensation arrangements for the FSC to acquire and retain needed expertise.
  - World Bank technical assistance is ongoing for BDIF/IADI core principles assessment.

*Source: IMF staff report text from the Bulgaria Article IV consultation (excerpts provided).*

### 15.      The systemic nature of the high private sector debt overhang and NPL problem in

### _cr15119 - 15.      The systemic nature of the high private sector debt overhang and NPL problem in

### The NPL problem and recommended comprehensive strategy
- Proactive steps by the BNB to ensure proper identification of NPLs and promote effective write-offs (and disposal of encumbered collateral) are critical to advance balance sheet clean-up and mitigate asset price uncertainty.
- Ongoing supervisory initiatives by the BNB to promote phased increases in provisioning in line with the aging of NPLs in selected banks are welcome, but staff noted that a more systematic approach might be warranted (for example, by introducing specific guidelines as done recently in other countries, including Romania).
- The BNB could complement these efforts with a systematic review—possibly with support from external workout specialists—of banks’ debt recovery and restructuring processes (including workout tools, IT systems, and governance frameworks) to ensure these are adequate to manage NPLs.
- Complementary government-supported initiatives are needed to facilitate an orderly corporate deleveraging process:
  - Consider guidelines for voluntary out-of-court debt workouts.
  - Consider measures to address judicial bottlenecks to timely and predictable insolvency proceedings.
- Ongoing work under the Vienna Initiative to foster an effective framework for NPL management in central and south-eastern Europe could provide a useful platform for Bulgaria.

### Single Supervisory Mechanism (SSM) and euro adoption
- Working toward SSM participation could generate reform momentum and act as a credibility anchor, though the decision would need to take into account a range of considerations and the evolving financial architecture of the EA/EU.
- Staff stressed that SSM-preparation efforts should not detract from prompt follow-through on actions to address NPLs; such actions could be seen as integral to preparations for SSM participation.

### Authorities’ views on financial stability and NPL actions
- The authorities stressed their continued commitment to safeguarding financial stability.
- The BNB noted liquidity measures following the KTB closure had supported depositors’ confidence and maintained system-wide stability.
- Work underway to rebuild confidence in financial sector oversight includes intensified on-site inspections, the external BCP assessment, BRRD implementation, and the forthcoming system-wide AQR.
- Authorities recognized the importance of the appointment of the new head of supervision and reforms to reinforce regulatory independence.
- They saw current efforts to promote a gradual reduction in NPLs as having had some success and indicated openness to considering a more systematic approach.
- Authorities are assessing the best means to recapitalize the BDIF and ensure readiness for the planned AQR, including contingency plans in case recapitalization needs materialize.
- They recognized the importance of the timely confirmation of a new BNB governor.
- The authorities reconfirmed commitment to Euro adoption and SSM participation; movement toward Euro adoption will depend on greater progress in addressing structural rigidities to increase economic flexibility and accelerate income convergence.

### Restoring fiscal discipline and rebuilding buffers — background and recent outcomes
- The fiscal deficit rose to 3.7 percent of GDP in 2014, twice the original budget target (cash basis).
- Factors behind the 2014 deficit increase:
  - Revenues: Large projected increases in tax collection were not realized; grants were lower than projected.
  - Expenditures: Expenditures were not adjusted to reflect revenue underperformance; unprogrammed health-related expenditures added to spending pressure.
  - Execution rates for EU-funded investments improved, but reimbursements were temporarily interrupted due to procurement and control concerns.
- Costs associated with banking sector emergency support were fully recorded below the line, with no impact on the 2014 deficit.
- The expansionary fiscal stance breached the national fiscal rule (cash deficit ceiling of 2 percent of GDP).
- Public debt increased sharply in 2014:
  - Total public debt rose 9 percentage points to 27 percent of GDP at end-2014.
  - Included a EUR 1.5 billion (3.6 percent of GDP) loan raised for state support to the banking sector.
- Fiscal reserve stood at BGN 8.1 billion on a cash basis at end-2014.
- On March 20, 2015, Bulgaria placed triple-tranche Eurobonds (7, 12, and 20 years) for €3.1 billion (7.4 percent of GDP), fulfilling the bulk of the 2015 financing requirements.

### 2015 budget and medium-term fiscal plans
- For 2015, the government’s budget targets a 3 percent of GDP headline deficit (cash basis), above the national rule; this compares to a target of 1.5 percent of GDP in the 2014 Convergence Program.
- The 2015 budget is underpinned by conservative revenue assumptions and entails a reduction in the structural deficit on a cash basis by about 0.8 percent of potential GDP versus 2014 (with this adjustment likely to be substantially smaller on accrual basis).
- Adjustment is driven mainly by reduction in compensation, health-related transfers, and contingency funds.
- Further reductions of the headline deficit by 0.5 percent of GDP in each of 2016 and 2017 are programmed.

### Staff views on fiscal strategy and recommendations
- Faster consolidation than currently planned should be considered to support policy credibility, strengthen buffers, and reduce medium-term risks.
- While debt remains relatively low, the recent jump in debt levels is not expected to be corrected under the authorities’ baseline scenario; medium-term debt dynamics are sensitive to macro-financial shocks and contingent liabilities.
- Given low fiscal multipliers and substantial scope for efficiency gains, the potential negative growth effects of a more ambitious pace of consolidation are outweighed by the benefits of rebuilding fiscal buffers and strengthening credibility.
- 2015 specific recommendation:
  - The 3 percent deficit target is achievable, but downside risks from deflation and ambitious wage and health spending targets make expenditure restraint critical.
  - If risks materialize, seek savings in current spending and prioritize high-quality investment projects.
  - Any revenue over-performance should be saved.
- Medium-term recommendation:
  - Targeting a structural balance by 2019—through an average adjustment of 0.75 percent of GDP per year—would improve debt dynamics and build a liquidity buffer, allowing automatic stabilizers to work fully in the event of a modest negative shock.

### Concrete plans needed to address medium-term fiscal risks
- Long-term pressures from an aging population and continued emigration will create significant public spending challenges.
- Measures needed:
  - Improve composition and quality of expenditure.
  - Reduce contingent risks associated with state-owned enterprises, particularly related to transport and energy.
- Pension system:
  - Ensuring public pension sustainability, including through parametric reforms, remains critical.
  - Concerns exacerbated by reversal and delays of earlier reforms, including change in benefit formula and freezing of retirement ages in 2014.
  - Last-minute provisions in the 2015 budget allow optional transfer from the second mandatory private pillar to the public system—a fundamental change in the three-pillar pension system.
  - Implementing regulations, including provisions for an open-ended option to shift between public and private systems over time, are expected to be proposed shortly; sufficient time should be provided for impact analysis and stakeholder consultations.
- Health system:
  - Follow-through on plans to improve the National Health Insurance Fund’s financial strength and efficiency is critical.
  - Measures to strengthen cost control mechanisms, increase incentives for proper use of outpatient versus inpatient services, and upgrade IT systems are needed.
- Fiscal risk management:
  - Enhance disclosure regarding budgetary risks.
  - Expand risk analysis of contingent liabilities (explicit and implicit) and sustainability analysis of pension and health systems.
  - Consider a Fiscal Transparency Evaluation (Appendix V).
  - Redress delays in establishing a fiscal council with operational independence.

### Authorities’ fiscal views
- Authorities intend to pursue continued fiscal consolidation in coming years.
- For 2015, they agreed the 3 percent deficit target was achievable given measures on containing wage and health spending.
- They reported strong revenue performance during the first two months of the year, supported by enhanced revenue administration.
- They were cautious about a faster pace of consolidation given still fragile growth dynamics.
- On pension reforms, authorities indicated reforms would increase flexibility for individuals and emphasized careful assessment of design features before adoption.
- Authorities broadly agreed on staff recommendations to enhance transparency of fiscal indicators and strengthen assessment of fiscal risks related to contingent liabilities and pension and health systems.

### Advancing structural reforms — background and staff views
- Bulgaria continues to see only slow income convergence with EU counterparts; it remains the poorest EU member with income levels less than half the EU average and relatively high structural unemployment and disparities.
- Recent political and financial turmoil highlighted longstanding governance and institutional issues including corruption, weak institutions, and an ineffective judiciary.
- The 2014 Corruption Perception Index ranked Bulgaria, together with Greece, Italy, and Romania, lowest among EU members.
- EC reported under the Cooperation and Verification Mechanism that progress in judicial reform, anti-corruption work, and fight against organized crime is insufficient in Bulgaria.
- Energy sector inefficiencies, notably in the national electricity supplier (NEK), have become acute:
  - NEK’s reported debt is now estimated at around 4 percent of GDP.
  - Cross-sector subsidies obscure full assessment of the energy sector’s financial situation and contingent fiscal liabilities.
  - The burden of an inefficient sector increasingly falls on the corporate sector and raises public finance risks.
- Staff recommendations:
  - Kick-start structural reform agenda to address institutional and structural gaps, strengthen human capital, address infrastructure gaps, and increase ease of doing business.
  - Establish clear momentum now to demonstrate commitment to reduce corruption and cronyism, strengthen rule of law, and rebuild confidence in institutions.
  - Active labor market policies and improvements in education and training are important to reduce labor market rigidities.
  - Comprehensive energy sector strategy is urgent:
    - Recent amendments to the energy act can help reduce pressure on the public electricity company and other market participants by strengthening regulatory independence and addressing production cost rigidities.
    - Reduce output share of inefficient power plants and re-negotiate long-term purchase agreements.
    - Design and implement a comprehensive energy sector strategy to support a transparent and well-functioning electricity market, in line with EC and World Bank recommendations.
    - Proceed with well-designed, phased rationalization of electricity prices, taking advantage of current low-cost environment, while strengthening protections for poor households.
    - Enhance governance of major energy SOEs and operational capacity of the regulator.

*Source: IMF staff report chapter on Bulgaria (content as provided).*

### 30.      The authorities underscored their commitment to advance the structural agenda.

### _cr15119 - 30.      The authorities underscored their commitment to advance the structural agenda.

### Authorities' actions and priorities
- Priority programs to be highlighted in the April update to the National Reform Program under the EU framework.
- Energy sector:
  - New regulator will have increased independence with appointment of new members by Parliament (which occurred following the mission).
  - One of the regulator’s early priorities is to review the tariff structure.
  - Authorities are optimistic that the tariff review will significantly improve NEK’s financial condition.
  - Importance of early progress in reforms to support a more open and transparent electricity market was emphasized.

### Staff appraisal — macroeconomic and financial assessment
- 2014 outcomes and near-term outlook:
  - Modest growth and a small reduction in unemployment were achieved in 2014.
  - Deflationary pressures increased in 2014; inflation expected to turn positive late in the year.
  - Growth is expected to moderate in 2015 and to remain below the level needed to accelerate income convergence into the medium term.
- Resilience and risks:
  - Strong banking system liquidity prior to the KTB failure, plus liquidity measures by the BNB and government, helped calm depositors and avert system-wide spillovers.
  - Bulgaria’s policy credibility has come under scrutiny; political turbulence and unaddressed governance issues increased risks to the outlook.
  - High corporate debt and NPLs could drag on future investment if not addressed.
  - Risks from persistent deflationary pressures, weak external demand, regional tensions, and developments in Greece require continued close monitoring and contingency planning.

### Policy recommendations — near-term and medium-term priorities
- Comprehensive policy response:
  - Rebuild fiscal and financial sector buffers against potential shocks.
  - Address gaps in financial sector oversight revealed by the bank failure.
  - Avoid letting near-term challenges detract from progress on broader structural rigidities and governance challenges.
- Banking sector and supervision:
  - Decisive actions to strengthen the banking system and restore confidence in supervisory activity are critical.
  - Forceful steps needed to strengthen supervisory processes and address gaps in accountability and crisis-management frameworks.
  - An independent AQR of the banking system is required.
  - A comprehensive strategy is needed to advance balance sheet repair, reduce asset-price uncertainty, and promote orderly deleveraging given high private sector debt and NPLs.
- Fiscal policy:
  - This year’s 3 percent of GDP deficit target is achievable, but expenditure restraint will be critical given downside risks related to deflation and ambitious wage and health spending targets.
  - Any revenue upside should be saved.
  - Targeting a structural balance by 2019 would support downward debt dynamics, create space to cope with contingent risks, and allow automatic stabilizers to work fully in the event of a modest negative shock.
  - Concrete plans needed to address medium-term fiscal risks from an aging population and to mitigate contingent liabilities from state-owned enterprises.
  - Sustainability of the public pension system remains a key concern; risks associated with ongoing reforms to both the first and second pillar systems need careful assessment.
  - Increased reporting of fiscal risks and establishment of an independent fiscal council would help support policy credibility.
- Structural reforms and governance:
  - After several years of limited progress, authorities need to jump-start the structural reform agenda.
  - Urgent need for a comprehensive strategy for energy sector reform as part of a broader structural agenda to address rising costs and productivity drains.
  - Demonstrable momentum needed on reducing corruption and cronyism, strengthening the rule of law, and rebuilding confidence in critical institutions to catalyze investment, productivity gains, job creation, and income convergence.

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

### Fiscal Reserve Account (FRA) — composition, trends, and projections
- FRA purposes and composition:
  - FRA comprises various fiscal reserve deposits and account receivables from EU funds for certified expenditures.
  - At end-2014, about ¼ of the FRA was earmarked to the Silver Fund (established in 2006 to foster and guarantee the sustainability of the Pillar 1 state pension system).
  - FRA also includes resources to cover operational needs of the government and balances of extra-budgetary funds and autonomous institutions.
  - FRA included deposits related to liquidity support to FIB for BGR 0.9 billion, suggesting substantial FRA resources may not be available for emergency fiscal purposes.
- Trends and levels:
  - FRA, on a generally declining trend since 2009, increased sharply in 2014 and is expected to remain at comfortable levels in 2015.
  - FRA declined to BGN 4.7 billion at end-2013 versus a statutory end-year limit of BGN 4.5 billion.
  - FRA increased sharply to BGN 9.2 billion by end-2014.
  - The FRA, excluding account receivables from EU funds, stood at BGN 8.1 billion at end-2014.
- Debt management and projections:
  - Increase in FRA was due to additional borrowing for bank resolution-related needs and pre-financing of large redemptions of a Eurobond in January 2015.
  - Following the €3.1 billion Eurobonds issuances in March, which will cover the bulk of maturing external debt this year, the FRA is expected to remain comfortably above the minimum for end-2015.
- FRA composition (as of end-2014) — percentages:
  - Silver Fund: 27%
  - Deposits of central budget at BNB: 23%
  - Deposits of central budget at banks: 14%
  - Deposits related to EU funds: 15%
  - Deposits of extrabudgetary funds/autonomous entities at BNB: 9%
  - Deposits of extrabudgetary funds/autonomous entities at banks: 1%
  - Account receivables from EU funds: 11%

*Source: _cr15119 - 30.      The authorities underscored their commitment to advance the structural agenda.*

### Box 2. Bulgaria: Electricity Sector Challenges

### Box 2. Bulgaria: Electricity Sector Challenges

### Key fiscal and financial findings
- NEK faced a heavy debt burden and sustained losses from on-going operations.
- In October 2013, Bulgarian Energy Holding (BEH) issued bonds for EUR 500 million and on-lent the proceeds to NEK to help address arrears.
- NEK continued to fail to meet its obligations in a timely manner after the on-lending.
- With three reductions in electricity tariff rates in 2013, NEK’s financial conditions deteriorated rapidly in 2014.
- Loss write-offs consumed more than half of NEK’s equity in the four quarters since 2013Q3.
- Short-term liabilities to suppliers reached BGN 1.7 billion as of September 2014.
- As of September 2014, NEK reported total debt of more than Lev 3.2 billion (4 percent of GDP).
- NEK’s leverage and liquidity indicators as reported:
  - Debt to equity ratio of 174 percent.
  - Current assets covered only half of its short-term liabilities.

### Operational and investment impacts
- Short-term liabilities placed at risk the financial viability of upstream enterprises, including:
  - Public and private sector generators.
  - Renewable energy producers.
  - Combined heat and power producers (including district heating companies).
- NEK was forced to delay or scale back urgently needed maintenance and investments due to its financial position.

### Risks to public finances
- Given state ownership of NEK, sizable contingent liabilities to public finance could materialize in the event NEK is unable to generate sufficient cash flows to service its debt.

*Source: Box 2. Bulgaria: Electricity Sector Challenges*

### Appendix I. External Sector Assessment

### Appendix I. External Sector Assessment

### Current account adjustment and drivers
- Prior to the crisis, Bulgaria ran a current account deficit of 24.3 percent of GDP in 2007.
- Following the collapse in capital inflows (including FDI), the current account adjusted from a deficit of 24.3 percent of GDP in 2007 to a surplus in 2013 and 2014.
- Key drivers of the adjustment:
  - Sharp reduction in capital inflows and FDI.
  - Sharp import compression driven by weakened domestic demand and a plunge in investment-related imports.
  - Resilient export performance supporting the adjustment.
  - Modest improvement in the income balance driven by reduced repatriation of FDI-related earnings.
  - Increasing EU current transfers supporting adjustment.

### Real exchange rate (REER) and competitiveness
- CPI-based REER:
  - Declined by about 4 percent through end-2013 from its pre-crisis peak.
  - Comparator declines: 13 percent in EU countries and 9 percent in NMS countries through end-2013.
- ULC-based REER:
  - Increased cumulatively close to 30 percent over 2008–13.
- Market-share and productivity:
  - Bulgaria’s market share in major export destinations has improved, including relative to peers, in recent years.
  - Improvement likely supported by substantially higher productivity gains in tradable industrial sectors than in non-tradable service sectors.
- Wage dynamics and medium-term risks:
  - Bulgaria’s average wage remains the lowest among EU members.
  - Continuation of high overall wage increases (well above productivity growth) would likely become more binding for competitiveness in the medium term, especially via labor mobility from non-tradable to tradable sectors.
  - There is scope to improve domestic value-added of exports (which, while growing, represents a declining share of overall exports) and to move up the quality ladder.

### EBA-lite assessment and interpretation
- EBA-lite result:
  - Calculated undervaluation of Bulgaria’s REER by about 16 percent based on a cross-country panel regression.
  - The actual current account deviates from its calculated norm by over 7 percent of GDP; the sizable deviation of actual from fitted current account balance is close to 8 percent of GDP.
- Cautions in interpretation:
  - The model likely does not capture country-specific structural factors related to the pre-crisis boom and post-crisis adjustment.
  - Exchange rate movements were not the primary factor behind the sizable current account movements; capital account developments were.
  - The model appears to underestimate the current account response to the output gap.

---

### Appendix II. Reserve Adequacy

### ARA composite metric and traditional indicators
- ARA composite metric:
  - Bulgaria’s reserves remain well within the range suggested by IMF’s ARA composite metric.
  - Ratio rose from about 120 percent at end-2013 to an estimated 130 percent as of end-2014.
  - Fluctuations in short-term debt and broad money have been adequately covered by reserve accumulation.
- Traditional indicators:
  - As of end-2014, reserves are estimated to cover over six months of 2015 projected imports.
  - Reserve coverage of short-term debt at remaining maturity and of the current account deficit improved notably since 2008 and has remained above 100 percent since 2012.
- Monetary base and broad money coverage:
  - Ratio of international reserves to the monetary base remains above 150 percent as of end-2014 despite a decline in recent years.
  - Reserve coverage of broad money improved slightly in 2014, to nearly 50 percent.

---

### Appendix III. Debt Sustainability

### External debt trends and outlook
- External debt levels:
  - Gross external debt peaked at about 110 percent of GDP at end-2009.
  - Declined to around 90 percent of GDP at end-2014, largely due to private sector deleveraging.
  - Bank external debt fell from about 25 percent of GDP at its peak to under 14 percent of GDP at end-2014.
  - Excluding intercompany lending, external debt was a little over 55 percent of GDP at end-2014, largely matched by international reserves.
- Projections:
  - Under staff’s baseline projections, external debt is set to reach under 80 percent of GDP by 2019, primarily due to nominal GDP growth with relatively little change in nominal external debt.
  - Under the historical DSA scenario, the denominator effect on the debt-to-GDP ratio is even stronger because historical growth is higher than projected growth.
- Resilience to shocks:
  - Shocks to interest rate, growth rate, and current account deficit would shift the external debt trajectory upward but under all scenarios the external debt-to-GDP ratio is projected to eventually resume a downward path over the medium term.
  - Rollover risks in the nonbank private sector are contained given moderate short-term exposure.

### Public debt dynamics and risks
- Public debt:
  - Public debt increased significantly in 2014 but remains at manageable levels.
  - Fiscal adjustment under the baseline is not sufficient to secure debt firmly on a downward path in the medium term if FRA balances remain at the projected 2015 level.
  - Assuming FRA balances remain at the projected 2015 level, there will be virtually no correction to the increase in debt levels during the projection period.
- Sensitivities:
  - Medium-term debt dynamics are sensitive to macro-financial shocks and the materialization of contingent liabilities.
  - A combined macro-fiscal shock would bring the debt ratio above 40 percent by 2017.
  - Risks that could increase debt outcomes:
    - Intensified deflationary pressures.
    - Unaccounted contingent liabilities (e.g., from SOEs and the banking sector).
    - Spending pressures related to the aging population, given recent reversals in pension reforms and additional system changes under discussion.
    - Inefficiencies in the health sector.
- Market access and refinancing:
  - Recent successful Eurobond issuance has substantially reduced near-term refinancing risk.
  - Moderate refinancing needs are projected for the next five years.
  - Addressing underlying fiscal vulnerabilities is important to preserve market access at favorable rates.

### Selected numerical indicators and projections (as reported)
- Sovereign spreads and related indicators (As of March 16, 2015):
  - Nominal gross public debt: 20.5 17.6 26.9 28.9 30.7 31.9 32.2 31.9 31.0 (values across years shown in source table).
  - German bonds: 50 (presentation context in table).
  - Y CDS (bp): 171.
- Real GDP growth (selected years): 3.3 1.1 1.7 1.2 1.5 1.8 2.0 2.3 2.5.
- Inflation (GDP deflator, selected years): 5.8 1.6 -0.8 -0.1 1.1 2.2 2.5 2.6 2.6.
- Nominal GDP growth (selected years): 9.3 0.3 2.3 0.2 2.1 3.0 3.9 4.4 4.7.
- Effective interest rate (in percent): 4.8 5.0 4.1 3.9 5.1 5.2 4.8 5.7 4.9.
- Change in gross public sector debt (cumulative): -3.2 0.5 9.3 2.0 1.8 1.2 0.3 -0.2 -0.9 4.1 (table entries across projection years).
- Identified debt-creating flows (selected components):
  - Primary deficit: -1.2 1.3 3.4 2.4 1.8 1.1 0.6 0.1 -0.4 5.6.
  - Primary (noninterest) revenue and grants: 34.5 34.2 33.8 34.5 34.2 34.3 34.5 34.7 34.8 207.1.
  - Primary (noninterest) expenditure: 33.3 35.5 37.3 36.9 36.0 35.4 35.1 34.8 34.5 212.7.
  - Automatic debt dynamics: -1.9 0.5 0.1 0.7 0.7 0.3 0.1 0.2 -0.1 1.9.
  - Interest rate/growth differential: -1.1 0.4 0.6 0.7 0.7 0.3 0.1 0.2 -0.1 1.9.
  - Exchange rate depreciation contribution: -0.8 0.1 -0.4 ...
  - Other identified debt-creating flows: -0.3 -1.7 6.1 -1.0 0.0 0.0 0.0 0.0 0.0 -1.0.
  - Privatization receipts (negative): -1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1.
  - Contingent liabilities: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0.
  - On-lending to DF and change in FRA: 0.8 -1.7 6.1 -1.0 0.0 0.0 0.0 0.0 0.0 -0.9.
  - Residual, including asset changes: 0.3 0.4 -0.3 -0.1 -0.6 -0.3 -0.4 -0.6 -0.5 -2.5.
- Baseline scenario macro assumptions (selected):
  - Real GDP growth: 1.2 1.5 1.8 2.0 2.3 2.5 (2015–2020).
  - Inflation: -0.1 1.1 2.2 2.5 2.6 2.6 (2015–2020).
  - Primary Balance: -2.4 -1.8 -1.1 -0.6 -0.1 0.4 (2015–2020).
  - Effective interest rate: 3.9 5.1 5.2 4.8 5.7 4.9 (2015–2020).

---

### Appendix IV. Corporate Commercial Bank: Bank Failure and Resolution

### Background on Corporate Commercial Bank AD (KTB)
- As of end-2013, KTB was:
  - The fourth largest bank in Bulgaria in terms of assets.
  - Third in terms of net profits.
  - First in terms of deposit growth.
- Funding strategy and exposures:
  - Since late 2011, KTB pursued an aggressive funding strategy with interest rates on deposits well above those of other banks, rapidly expanding market share.
  - The commercial portfolio was concentrated in the corporate sector.
  - Deposit base and portfolio included sizable exposures to SOEs, notably in electricity and other network industries.
- Reported supervisory metrics (2013 consolidated financial statement):
  - Capital adequacy ratio: 12.6 percent (compared to the BNB minimum requirement of 12 percent and a system average of 16.9 percent) as of end-December 2013.
  - Reported NPL ratios: 0.2 percent, significantly below the system average (system average value reported elsewhere in source).

*Source: IMF staff analyses and calculations in “Appendix I. External Sector Assessment”, “Appendix II. Reserve Adequacy”, “Appendix III. Debt Sustainability”, and “Appendix IV. Corporate Commercial Bank: Bank Failure and Resolution” from the provided IMF chapter.*

### 16.9 percent. In June 2014, KTB acquired from Credit Agricole its Bulgarian subsidiary, later renamed

### _cr15119 - 16.9 percent. In June 2014, KTB acquired from Credit Agricole its Bulgarian subsidiary, later renamed

### Distress triggers and spillovers
- KTB was placed under conservatorship by the BNB’s Governing Council on June 20, 2014, following a massive deposit run.
- Within days KTB lost BGN 1.2 billion or about 20 percent of its total deposits.
- The run followed media speculation of a concerted attack by powerful interests and rising concerns about the bank’s solvency (including allegations of fraud and connected lending).
- On June 22, KTB’s subsidiary, Commercial Bank Victoria EAD (CBV), was placed under special supervision by BNB; all payments to customers by the two banks were suspended (including access to guaranteed deposits).
- By June 27, system pressures spread: First Investment Bank (FIB), the largest domestic bank, lost about 10 percent of its deposits and was forced to close in the afternoon.
- These events occurred amid substantial domestic uncertainty following the announced resignation of the government earlier in the month.

### Immediate policy response
- On June 29, the President announced a consensus package (supported by the government, opposition, and BNB) to preserve financial stability.
- The package included a liquidity assistance scheme of up to BGN 3.3 billion or 4 percent of GDP, providing 5-month state deposits at market conditions to solvent Bulgarian credit institutions in need of liquidity support.
- Terms of the scheme were set in line with EU state aid rules as approved by the EC.
- The package calmed depositors and allowed FIB and other banks to re-open on June 30 with no need for deposit restrictions and only limited additional withdrawals.
- Under the scheme, FIB was granted a state deposit of BGN 1.2 billion; on November 28 FIB repaid BGN 0.3 billion and the remaining BGN 0.9 billion was extended by a maximum of 18 months in line with EU state aid rules.
- FIB presented a restructuring plan to the EC on November 12, including commitments to restore liquidity and improve corporate governance and risk management.

### KTB audit results
- On June 25, at BNB’s request, a review of KTB bank group’s assets and liabilities was initiated by independent external auditors.
- On July 11 preliminary audit results revealed significant shortcomings in documentation on KTB’s financial position and loan portfolio, necessitating a more comprehensive audit and delaying planned re-opening.
- While audit and license decisions were pending, all deposits remained frozen with no authorized payments of protected depositors by the Deposit Insurance Fund (BDIF).
- Audit results published on October 22 identified impairment deviations of about BGN 4.22 billion, of which BGN 3.4 billion (64 percent of KTB total loan portfolio) were loans to newly created investment companies without staff and operational activity and lacking necessary credit risk information.
- After recognizing impairment deviations, KTB showed negative capital of about BGN 3.75 billion.

### Resolution strategy
- KTB:
  - On November 6, BNB revoked KTB’s banking license based on negative capital findings.
  - Liquidation was the only available option under existing legislation (no legal framework for restructuring and pending implementation of the EU Directive on Bank Recovery and Resolution).
  - BNB requested the district court start insolvency proceedings under Bulgarian law on bank bankruptcy; shareholders appealed, halting proceedings.
  - License revocation triggered BDIF payout conditions: payout began on December 4 for up to up to BGN 196,000, i.e. EUR 100,000, per depositor through selected servicing banks.
  - BDIF had BGN 1.8 billion available; the funding gap to cover all protected depositors was estimated by BDIF at approximately BGN 1.7 billion at end-October.
  - On December 3, the government approved a loan to BDIF of up to BGN 2 billion with maturity up to 5.5 years at a fixed interest rate of 2.95 percent to cover the gap.
  - Majority of KTB guaranteed depositor payments were carried out as deposits in other banks; private sector deposit growth for the system as a whole was 1.5 percent y-o-y in December.
- CBV:
  - July 11 audit indicated CBV’s financial indicators were within regulatory requirements but lacked sufficient liquid funds to meet obligations.
  - Given KTB group’s bankruptcy, CBV could not receive state aid; sale of parts of its loan portfolio was used to secure liquidity.
  - Selected bids closed on November 14, providing additional liquid funds for full repayment of deposit obligations (guaranteed and non-guaranteed).
  - BNB authorized CBV to resume banking activity and restart servicing depositors without restrictions on December 12; special supervision expired on December 23.

### Appendix V — Transparency of Fiscal Risks: key findings
- Fiscal risks include macroeconomic uncertainty and specific sources such as calls on government guarantees, tax disputes, litigation, and changes in government assets and liabilities.
- Strengthening fiscal risk management begins with enhancing disclosure and risk analysis.
- Preliminary analysis suggests scope to enhance disclosure and risk assessment in areas where fiscal risks appear large:
  - Some indicators are published but (i) not frequently enough (e.g., actuarial assessment of NSSI; government debt strategy) or (ii) not in a form that allows easy risk assessment (e.g., aggregated data on public corporations; litigations to the government).
  - Risk analysis is conducted in some areas but results are not regularly published (e.g., financial-sector stress tests; environmental costs).
  - In many areas risk analysis is not conducted by the government (e.g., health sector actuarial assessment of NHIF; contingent liabilities probability assessment for guarantees being called).

### Availability of fiscal risk indicators (selected items preserved exactly as reported)
- Sensitivity Analysis:
  - Annual convergence reports discuss impact of alternative macroeconomic scenarios on budgetary projections, but no probabilistic forecasts of fiscal outcomes are included.
- Specific Risks to Fiscal Forecasts:
  - Various fiscal risks are discussed in the budget report; some specific risks are regularly reported quantitatively (e.g., government guarantees), others only qualitatively (e.g., implicit/explicit contingent liabilities associated with public corporations and the banking sector).
  - Analysis of the financial position of public corporations is conducted periodically within the MoF for internal use.
- Long-Term Fiscal Sustainability Analysis:
  - For both NSSI and NHIF, (i) the annual budget law is accompanied by policy analysis, and (ii) data on financial flows are published.
  - Sustainability (actuarial) analysis is conducted for NSSI, but not frequently enough; no actuarial analysis is conducted for NHIF.
- Budgetary Contingencies:
  - Annual budget law includes contingency reserves that typically amount to 0.5–2 percent of GDP, but reserves largely comprise budgets of autonomous entities and earmarked programs, suggesting reserves are not fully dedicated to unforeseen spending needs.
  - Use of contingency reserves excluding budgets of autonomous entities requires Council of Ministers approval with regular in-year reporting; use of autonomous entities’ budgets is determined by respective managing bodies.
- Asset and Liabilities:
  - Size of general government balance sheet and risks to debt are analyzed and disclosed in Government Debt Management Strategy (full reports every three years with interim annual updates).
  - Government payment arrears are reported regularly (quarterly).
  - Collective information on litigations to the government is not publicly available.
- Other selected indicators:
  - Natural resources: Bulgaria does not have major natural non-renewable resources.
  - Government guarantees: size published annually, but estimate of likely fiscal cost of called guarantees is not published; maximum amount of new guarantees is determined by a budget law.
  - Financial sector exposure: explicit support including National Guarantee Fund guarantees is disclosed, but exposure related to prospective systemic events or results of bank stress tests is not disclosed.
  - Environmental risks: budget document discusses environmental risks quantitatively, but ministry analyses are not published.
  - Public-Private Partnerships: so far only concession projects; information on individual concession projects is available in Bulgarian online at the National Concession Register.
  - Sub-national governments: financial condition and performance published monthly; there is a limit on their liabilities or borrowing.
  - Public corporations: individual financial statements available on MoF website in Bulgarian; starting in 2014 National Statistics Institute compiles aggregated liabilities of public corporations not consolidated to general government under ESA 2010 and reports to Eurostat; no information or analysis on implicit contingent liabilities with respect to public corporations.

*Prepared by European Department (in consultation with other departments); April 16, 2015 — STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX*

### 5.      The teams agreed that the Bank and the Fund share responsibility on financial sector

### _cr15119 - 5.      The teams agreed that the Bank and the Fund share responsibility on financial sector

### Bank–Fund responsibilities and coordination
- The teams agreed that the Bank and the Fund share responsibility on financial sector issues, revenue administration, and pension reforms.
- The Bank will lead EU funds absorption, basic infrastructure, business environment, health and education reforms, and social inclusion.
- Both teams will keep the other apprised of upcoming missions and assessments.
- World Bank country economists participated in the Article IV Consultations in September 2012, November 2013, and March 2015.

### World Bank program and products (April 2011–June 2015)
- Work program products delivered (selected list with delivery dates as presented):
  - Technical assistance on pensions (analytic work) — April 2011
  - Water Sector Strategy (advisory) — June 2011
  - Poverty & Social Policy Monitoring (analytic work) — January 2012
  - Competitiveness Through Innovation (analytic work) — February 2012
  - Public Expenditures for Growth and Competitiveness (analytic work) — March 2012
  - Gas Security of Supply Study (analytic work) — June 2013
  - Health Sector Policy Note (analytic work) — October 2012
  - Support for the implementation of the National Roma Integration Strategy (analytic work) — June 2013
  - Regulatory Reform (analytic work) — June 2013
  - Mitigating the Economic Impact of an Aging Population — June 2013
  - FY11-FY13 Programmatic Education Sector (advisory) — September 2013
  - Bulgaria Power Sector Diagnostic Assessment — September 2013
  - Consumer Protection and Financial Advisory — May 2013
  - Gender Dimensions of Roma Inclusion (analytic work) — June 2013
  - Climate Change and Green Growth (analytic work) — October 2013
  - Optimizing and Integrating social Benefits and Employment Services Provision (advisory) — December 2013
  - Bulgaria Productivity Growth (analytic work) — March 2014
  - Bulgaria Energy Dialogue — June 2014
  - Financial Consumer Protection (advisory) — September 2014
  - Competition Policy Reforms and Business Environment — May 2014
  - Programmatic Education Sector FY14-15 (advisory) — June 2014
  - Deposit Insurance (regional task) — June 2014
  - (additional entries up to) — June 2015

- Fund engagement and outputs (selected timeline):
  - Fund TA provision on public debt management (Spring 2011)
  - Staff visit — October 2011 report
  - TA provision on national accounts — May 2012
  - 2012 Article IV Consultation — October 2012
  - Staff visit — November 2012 Board
  - 2013 Article IV Consultation — July 2013
  - Staff visit — November 2013
  - 2015 Article IV Consultation — Spring 2015

### World Bank strategy, lending, and IFC activity
- Country Partnership Strategy (CPS) for Bulgaria (Board discussion date): May 17, 2011.
  - CPS anchored in Bulgaria’s National Reform Program to implement the Europe 2020 Strategy and focused on three 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.
- Active Bank portfolio as of March 2015:
  - 2 operations at the original loan amount of US$177.7 million equivalent.
- Cumulative World Bank lending program to date:
  - 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, 44 have been completed (of which 14 have been fully or partially cancelled during implementation), and 2 operations are currently under implementation.

- Economic and Sector Work (recent analytical focus and outputs):
  - Assessing the economic and fiscal impact of an aging population; productivity growth; unfair trading practices; governance, quality assurance and financing of early childhood development, pre-university and higher education, and quality of teachers; institutional and strategic framework for workforce development; health sector financing; and Roma inclusion.
  - Recently completed analytical work includes: Mitigating the Economic Impact of an Aging Population, Productivity Growth (forthcoming), Addressing Unfair Trading Practices Early Childhood Development Assessment, Strengthening Higher Education, Teachers Assessment, Workforce Development Assessment, Health Sector Diagnosis, and Gender Dimensions of Roman Inclusion.
  - Six reimbursable advisory service (RAS) agreements signed since 2012 focusing on water supply and sanitation strategy and regulation, innovation (completed), roads, health financing, and agriculture and hydro melioration.

- IFC activity as of March 2015:
  - IFC had 38 projects (completed and ongoing) in Bulgaria with total commitments of over US$915 million.
  - IFC sectoral involvement (high-level highlights): renewable energy (largest wind park loan), Galata gas field development, agricultural land investment and land consolidation support, two specialized SME banks, establishment of Bulgaria’s first micro-lending bank, investment in a venture fund targeting SMEs, manufacturing modernization and expansion projects (electronics producer, large steel mill, two glass processing plants), environmental components in some projects (GHG reduction equipment, sensors for car emissions).

- Active World Bank operations (Table 1 excerpt):
  - Social Inclusion Project — US$59.0 million — Board date 2008
  - Municipal Infrastructure Development Project — US$118.7 million — Board date 2009

### Statistical issues — data coverage, compilation, and quality

Real Sector
- The National Statistical Institute (NSI) compiles national accounts consistent with the System of National Accounts 2008 (SNA 2008) and the European System of Accounts 2010.
- GDP data by activity and expenditure categories are compiled and reconciled within an annual supply and use framework.
- Government output and final consumption are 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.
- NSI 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 1995.
  - 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 3 quarters.
  - Annual data are disseminated about 5 quarters after the end of the reference year.
  - Estimates at constant prices use chain-linked indices.
  - Problems remain in coverage of private sector activities and in constant price estimates of capital formation and external trade, although progress made on export and import deflators.
  - Recent IMF TA advised on improving seasonal adjustment procedure of quarterly GDP and volume measures of taxes on products.

Price statistics
- NSI produces a domestic CPI, HICP (Harmonized CPI) according to Eurostat methods, and a 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).
- Coverage excludes some sectors, mainly owner-occupied housing and health and life insurance; since 2004 financial services are included.
- Work has started on inclusion of owner-occupied housing in the HICP under a Eurostat project.
- Geographical coverage of the index is restricted to 27 urban areas that account for an estimated 65 percent of sales.

Trade and customs statistics
- Flow of customs data improved; new system for processing customs records near completion.
- Development of export and import unit value indices progressing; current indices used as deflators for import and export components of national accounts.
- NSI Foreign Trade Statistics Department coordinates monthly with BNB to ensure consistency between NSI export/import data and balance of payments data.

Labor and wages data
- National accounts employment and hours worked compiled based on Labor Force Survey and Enterprises’ surveys:
  - “Quarterly survey on employees, hours worked, wages and salaries, and other expenditures paid by the employers”
  - “Annual enterprises survey on employment, wages and salaries, and other labor cost” adjusted according to ESA95 methodology.
- NSI 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 as well).
- Household labor force survey is an alternative source; methodological discrepancies between household and establishment surveys need consideration (especially agricultural employment).
- Since the beginning of 2003 a quarterly Labour force survey, providing average quarterly results, is implemented.
- Quarterly wage data compiled and published for various economic sectors; main shortcomings:
  - (i) under-reporting of private sector wages; and (ii) reporting of average gross earnings only and not wages by occupation.
- Since 2002, the 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 for private sector wages.
- A Population Census was conducted in early 2011 and is a source for redesigning household surveys.

Government Finance
- Progress in implementing accrual accounting for government, budgetary and statistical systems following recommendations of combined STA/FAD mission and within EU fiscal reporting framework.
- Consolidated cash-basis data covering general and central government operations routinely reported for publication in the GFS Yearbook/Annual CD-ROM and in IFS.
- Quarterly accrual GFS data for whole general government are reported for publication in IFS, through Eurostat.
- Major part of GFS data compiled by NSI; transmissions to Eurostat carried out by NSI.
- Since September 2008, Ministry of Finance (MOF) prepares and submits SDDS indicators for central government finances in GFSM 2001 format; same indicators published on MOF website monthly and quarterly.
- As of 2014, NSI, BNB and MoF agreed to use Eurostat-provided option for IMF data transmission so GFS data become consistent with ESA/EDP data by adding accrual data and scope aligning with ESA rules.
- NSI confirmed to Eurostat to use data from ESA tables 6 and 7 for reporting annual GFS to IMF.
- MOF prepares monthly consolidated government budget execution data following national presentation (not according to GFS standards) and publishes aggregate revenue, expenditure, balance and composition of financing; progress in disaggregated presentation including functional classification and full economic classification of expenditure available 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.

Balance of Payments
- Bulgaria provides quarterly BOP statistics for dissemination in IFS on a timely basis.
- BOP and IIP statistics compiled according to BPM5.
- The first transmission of IIP data on the basis of BPM6 will take place in March 2015.
- Since joining the EU in January 2007, trade data with EU countries are collected following INTRASTAT system.
- Imports and exports with non-EU member states based on SAD collected by Customs Agency; movement of goods within EU based on Intrastat declarations collected by National Revenue Agency.
- Data Template on International Reserves and Foreign Currency Liquidity disseminated monthly and quarterly external debt data reported to World Bank for redissemination in QEDS database.

Financial Soundness Indicators
- Bulgaria participates in the financial soundness indicators (FSIs) project.
- Annual FSI data are posted on the FSI website for the period 2005 – 2013.

*Source: _cr15119 - 5.      The teams agreed that the Bank and the Fund share responsibility on financial sector*

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

### _cr15119 - 13.      Bulgaria is subject to the statistical requirements and reporting standards of Eurostat

### Statistical framework and data 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 (2013 2) annual observation report for Bulgaria is posted on the Fund’s website: http://dsbb.imf.org/images/pdfs/AnnualReports/2013/BGR_SDDS_AR2013.pdf

### Data coverage and timeliness (as of February 26, 2015)
- Exchange Rates: Date of latest observation 30/01/2015; Date received 02/02/2015; Frequency of Data M; Frequency of Reporting M; Frequency of publication M
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation January 2015; Date received 18/02/2015; Frequency M M M
- Reserve/Base Money: January 2015; 24/02/2015; M M M
- Broad Money: January 2015; 24/02/2015; M M M
- Central Bank Balance Sheet: January 2015; 24/02/2015; M M M
- Consolidated Balance Sheet of the Banking System: January 2015; 24/02/2015; M M M
- Interest Rates: January 2015; 26/02/2015; M M M
- Consumer Price Index: January 2015; 15/02/2015; M M M
- Revenue, Expenditure, Balance and Composition of Financing – General Government (gross cash basis):
  - 2013: Date received 06/27/2014; Frequency A A A
  - December 2014: Date received 02/02/2015; Frequency M M M
- Stocks of General Government and General Government-Guaranteed Debt: December 2014; 02/04/2015; M M M
- External Current Account Balance: December 2014; 16/02/2015; M M M
- Exports and Imports of Goods and Services: December 2014; 16/02/2015; M M M
- GDP: Q4 2014; Date received 13/2/2015; Frequency Q Q Q
- Gross External Debt: November 2014; 27/01/2015; M M M
- International Investment Position: 2014 Q3; 30/12/2014; Q Q Q
- Notes: 1) Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. 2) Interest rates include market-based and officially-determined rates. 3) Financing categories include foreign, domestic bank, and domestic nonbank financing. 4) General government on gross cash basis includes central government (budgetary funds, extra budgetary funds, and social security funds) and local governments. 5) Debt includes currency and maturity composition. 6) M = Monthly; Q = Quarterly; A = Annually.

### IMF Article IV consultation—macroeconomic assessment and outlook
Findings:
- The Executive Board concluded the 2015 Article IV consultation on May 4, 2015 (Press Release No. 15/215, May 13, 2015).
- Bulgaria achieved modest growth in 2014 despite the failure of a large bank and fiscal deterioration; growth is expected to continue in 2015 at a lower rate.
- Consumer prices declined by an average 1.6 percent in 2014; projected to turn positive late in 2015.
- The banking system showed substantial resilience due to strong system liquidity and a liquidity support scheme introduced by the BNB and government, which helped avert system-wide spillovers.
- Fiscal deficit rose to 3.7 percent of GDP in 2014, twice the original target. The 2015 budget targets a 3 percent of GDP deficit, with a further 0.5 percentage point reduction per year thereafter.
- Long-term challenges include an aging population and emigration, and significant age, gender, and regional disparities in income.
- Corruption and inefficiencies in the power sector are highlighted as important areas for reform.

Executive Board recommendations and policy priorities:
- Comprehensive policy response to address risks and restart reform momentum.
- Decisive actions to close gaps in financial sector oversight and the crisis-management framework following the bank failure (KTB).
- Prompt implementation of planned reforms to the resolution framework and early recapitalization of the deposit insurance fund.
- Initiate an asset quality review (AQR).
- Comprehensive strategy to address high private sector debt overhang and nonperforming loans (NPLs) to advance balance-sheet repair and promote orderly deleveraging.
- Ongoing monitoring and contingency planning for developments in Greece.
- Consider more ambitious medium-term fiscal consolidation to rebuild fiscal buffers and restore policy credibility under the currency board arrangement, while ensuring consolidation does not unduly weaken domestic demand.
- Contain spending while enhancing efficiency and prioritizing high-quality public investment; save revenue over-performance.
- Concrete plans to address medium-term fiscal risks from population aging and contingent liabilities from state-owned enterprises (SOEs); improve pension system design and SOE efficiency.
- Broader structural reforms to catalyze investment and productivity gains, reduce corruption, and strengthen rule of law.

### Selected economic and social indicators (2011–16)
- Real GDP (percent change): 2011: 2.0; 2012: 0.5; 2013: 1.1; 2014: 1.7; 2015 Est.: 1.2; 2016 Proj.: 1.5
- Real domestic demand (percent change): 2011: 0.6; 2012: 2.8; 2013: -1.3; 2014: 2.7; 2015 Est.: 1.3; 2016 Proj.: 1.5
- Consumer price index (HICP, average): 2011: 3.4; 2012: 2.4; 2013: 0.4; 2014: -1.6; 2015 Est.: -1.0; 2016 Proj.: 0.6
- Consumer price index (HICP, end of period): 2011: 2.0; 2012: 2.8; 2013: -0.9; 2014: -2.0; 2015 Est.: 0.3; 2016 Proj.: 0.9
- Employment (percent change): 2011: -2.8; 2012: -1.1; 2013: -0.2; 2014: 1.3; 2015 Est.: 0.4; 2016 Proj.: 0.5
- Unemployment rate (percent of labor force): 2011: 11.3; 2012: 12.4; 2013: 13.0; 2014: 11.5; 2015 Est.: 10.9; 2016 Proj.: 10.3
- Nominal wages (national accounts definition, percent change): 2011: 8.6; 2012: 5.6; 2013: 4.5; 2014: 3.0; 2015 Est.: 3.0; 2016 Proj.: 3.0
- General government finances (percent of GDP):
  - Revenue: 2011: 31.2; 2012: 33.1; 2013: 34.5; 2014: 34.3; 2015 Est.: 35.0; 2016 Proj.: 34.6
  - Expenditure: 2011: 33.1; 2012: 33.6; 2013: 36.3; 2014: 38.0; 2015 Est.: 38.0; 2016 Proj.: 37.1
  - Balance (net lending/borrowing on cash basis): 2011: -1.9; 2012: -0.4; 2013: -1.8; 2014: -3.7; 2015 Est.: -3.0; 2016 Proj.: -2.5
- External financing (percent of GDP): 2011: 0.2; 2012: 2.6; 2013: -0.9; 2014: 7.2; 2015 Est.: 2.9; 2016 Proj.: 2.2
- Domestic financing (incl. fiscal reserve, percent of GDP): 2011: 0.2; 2012: -0.8; 2013: 0.9; 2014: 2.6; 2015 Est.: -0.9; 2016 Proj.: 0.3
- Gross public debt (percent of GDP): 2011: 14.8; 2012: 17.1; 2013: 17.6; 2014: 26.9; 2015 Est.: 28.9; 2016 Proj.: 30.7
- Broad money (M3, percent change): 2011: 12.2; 2012: 8.4; 2013: 8.9; 2014: 1.1; 2015 Est.: 3.7; 2016 Proj.: 5.4
- Domestic private credit (percent change): 2011: 3.8; 2012: 2.8; 2013: 0.3; 2014: -7.7; 2015 Est.: 1.6; 2016 Proj.: 4.1
- Interbank rate, 3-month SOFIBOR (percent): 2011: 3.8; 2012: 2.3; 2013: 1.1; 2014: 0.8; 2015: ...; 2016: ...
- Lending rate (percent): 2011: 10.6; 2012: 9.7; 2013: 9.1; 2014: 8.3; 2015: ...; 2016: ...
- Current account balance (percent of GDP): 2011: 0.1; 2012: -1.1; 2013: 2.3; 2014: 0.0; 2015 Est.: 0.2; 2016 Proj.: -0.8
- Capital and financial account balance (percent of GDP): 2011: -1.0; 2012: 4.4; 2013: -2.3; 2014: 7.1; 2015 Est.: 1.7; 2016 Proj.: 5.0
- Foreign direct investment balance (percent of GDP): 2011: 3.0; 2012: 2.1; 2013: 2.7; 2014: 2.4; 2015 Est.: 2.5; 2016 Proj.: 2.9
- International investment position (percent of GDP): 2011: -83; 2012: -76; 2013: -74; 2014: -71; 2015 Est.: -66; 2016 Proj.: -63
- Gross external debt (percent of GDP): 2011: 91; 2012: 92; 2013: 91; 2014: 94; 2015 Est.: 90; 2016 Proj.: 89
- Gross official reserves (percent of GDP): 2011: 33; 2012: 38; 2013: 35; 2014: 39; 2015 Est.: 41; 2016 Proj.: 44
- Exchange rate: Leva per euro — Currency board peg to euro at lev 1.95583 per euro
- Leva per U.S. dollar (end of period): 2011: 1.51; 2012: 1.48; 2013: 1.42; 2014: 1.61; 2015: ...; 2016: ...
- Real effective exchange rate (percent change): 2011: 2.7; 2012: -2.0; 2013: 1.3; 2014: -0.5; 2015: ...; 2016: ...
- Social indicators (reference years shown):
  - Per capita GNI (2012): US$ 7,030
  - Income distribution (Gini index, 2007): 28.2
  - Poverty rate (2011): 21.2
  - Primary education completion rate (2012): 98.1
  - Births per woman (2012): 1.5
  - Mortality under 5 (per 1,000) (2012): 12.1
  - Life expectancy at birth (2012): 74.3 yrs

### Authorities’ statement and policy measures (May 4, 2015)
Key actions and plans:
- Currency Board Arrangement (CBA) remains the cornerstone of domestic policymaking.
- BNB actions after KTB failure: increased bank liquidity, support depositor confidence, state liquidity support framework (compliant with EU state aid rules), smooth repayment of insured deposits in KTB.
- March 2015: Bulgaria issued a €3.1 billion Eurobond covering 2015 external financing needs and serving as an additional buffer.
- April 2015: New Law on the Fiscal Council adopted to establish an independent consultative Fiscal Council to Parliament.
- Government near-term plan pillars: (1) gradual fiscal consolidation and enhanced revenue administration; (2) rebuilding confidence in the financial sector through system-wide legal amendments and institutional enhancements; (3) structural reforms.
- 2015 government Spring Forecast revised 2015 growth upward by 0.6 percentage points to 1.4 percent; growth in 2016–18 expected to reach 2.3 percent (driven by domestic demand) but remain insufficient for income convergence.
- Authorities commit to tight control over nominal public sector wages in the short term and closer alignment of utility tariffs with cost structure; measures to be accompanied by enhanced protection of the poor and management of inflationary expectations.
- Fiscal strategy: medium-term budgetary framework envisages nominal reduction of the fiscal deficit on cash basis by 0.5 percent per year until 2018; return to a structurally balanced budget by 2019.
- 2015 budget envisages a deficit of 3 percent of GDP on cash basis and a reduction in the structural deficit by approximately 0.5 percent, mainly via improved spending efficiency; authorities committed to saving revenue overperformance.
- Banking sector reforms and supervision:
  - Requested full FSAP in August 2014; IMF/WB assessment of Basel Core Principles recently conducted; report to be published in Q2 2015.
  - National Reform Program Update action plan: (1) finalize assessment of BNB supervisory practices with Basel Core Principles; (2) establish recovery and resolution framework for credit institutions; (3) conduct AQR and stress test of the entire banking sector using ECB/EBA-compliant methodologies.
  - Domestic legislation transposing EU Directives on Deposit Guarantee Schemes and Recovery and Resolution of Credit Institutions and Investment Firms to be adopted by mid-2015.
  - Plans to recapitalize Bulgarian Deposit Insurance Fund and implement reasonable burden sharing.
  - Preparations to join the Single Supervisory Mechanism (SSM) envisaged, while noting asymmetric treatment of non-euro area participants.
- Structural reform priorities:
  - Updated National Reform Program to be submitted to the European Commission by end-April 2015.
  - Political consensus sought in 2015 for constitutional amendments to enable deep reforms in justice and intelligence.
  - Fast development of electronic administrative services and amendments to the Law on Access to Public Information to be adopted by June 2015.
  - Energy sector: recent amendments to the Energy Act; new independent energy regulator appointed; review of energy tariff structure; negotiated more favorable long-term prices with key electricity suppliers and schedule for settlement of arrears.
  - Pension reform proposal published with aim to reach agreement in 2015 on augmented package to overturn long-run deficit in the pension system.

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15119.pdf_