Bulgaria and the IMF

Press Release: IMF Completes Fourth Review Under Stand-By Arrangement with Bulgaria, Approves US$39 Million Disbursement, Grants Waivers, and Extends Arrangement
February 04, 2004

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BulgariaLetter of Intent and Supplementary Memorandum of Economic Policies

Sofia, Bulgaria, January 15, 2004

The following item is a Letter of Intent of the government of Bulgaria, which describes the policies that Bulgaria intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Bulgaria, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

The attached Supplementary Memorandum of Economic Policies (SMEP) discusses our performance under the program supported by the Stand-By Arrangement (SBA) with the Fund and the policies that the government and the Bulgarian National Bank plan to implement in 2004. Our core policy objectives--laid out in the Memorandum of Economic Policies dated February 12, 2002 and updated in the SMEPs dated July 5, 2002, January 22, 2003, and June 18, 2003--remain to maintain macroeconomic stability and achieve higher living standards through rapid and sustainable growth.

During the last six months, macroeconomic developments have remained favorable and the program has been largely on track, as discussed in the SMEP. However, we request a waiver for the likely nonobservance of the end-December 2003 performance criterion (PC) on collection of tax arrears. This breach is due to the delay in privatizing a state-owned enterprise from which arrears payments were anticipated. But, revenue performance overall has been better than expected. In addition, as all end-December PCs are legally controlling for the purchase associated with this review, we request a waiver of applicability for the following PCs that we expect to be fully observed, but for which data are not yet available: (i) overall fiscal deficit of the general government; and (ii) ceiling on the growth of the wage bill for 60 monitored state-owned enterprises. We are taking measures to expedite implementation of those indicative targets and structural benchmarks that were missed, largely due to technical difficulties. To allow purchase of the last tranche of this SBA, which can take place after it has been ascertained that end-December 2003 PCs have been met, we request an extension of this program from February 26, 2004 to March 15, 2004.

The Government believes that the policies set forth in the attached SMEP are adequate to achieve the objectives of this program, but will take any further measures that may become appropriate for this purpose. Bulgaria will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the SMEP, in accordance with Fund's policies on such consultation. We also believe that this program provides a solid basis for a successor precautionary SBA, which we subsequently intend to request. For now, we ask for the completion of the fourth review under this SBA.

Sincerely yours,

Milen Velchev
Minister of Finance
Ministry of Finance
Ivan Iskrov
Bulgarian National Bank

Supplementary Memorandum of Economic Policies of the Government of Bulgaria and the Bulgarian National Bank

A. Introduction

1. Bulgaria has continued to make progress toward sustained robust economic growth and higher living standards, which are key objectives of our economic program. To this end, we have maintained cautious fiscal and incomes policies in support of the currency board arrangement (CBA). Further, we are carrying out our structural reform agenda aimed at eliminating the remaining barriers to growth, while taking steps to reduce poverty and increase employment opportunities.

2. Our economic program--supported by a Stand-By Arrangement with the Fund--remains broadly on track. All end-June and end-September 2003 performance criteria (PCs) and indicative targets were observed, with the exception of the end-September PC on tax arrears collection by the General Tax Directorate (GTD) and the end-June and end-September indicative targets on arrears to the electricity company (NEK). Most structural benchmarks for end-June have been met as well, but several benchmarks for end-September and December were either missed or only partially observed. We are seeking to address these delays.

B. Background

3. Macroeconomic developments in 2003 remained favorable.

  • Real GDP growth reached 4 percent in the first half of the year, led by a sharp increase in private consumption and investment. The unemployment rate continued to decline significantly, reaching 12.9 percent at end-October 2003.

  • Inflation remained subdued, at 3.3 percent year-on-year through October.

  • Financial intermediation continued to increase, with broad money rising by 15½ percent and claims on the nongovernment sector rising by 41.9 percent year-on-year in real terms in September. Prudential indicators remained sound and banks reported strong profits.

  • However, the credit boom contributed to rapid import growth and a deterioration in the external current account balance, with the current account deficit increasing to 7½ percent of estimated GDP in the twelve months through August.

  • A rise in net FDI inflows maintained coverage of the current account deficit at about 60 percent in the twelve months through August. Combined with continued repatriation by banks of assets held abroad, this allowed gross international reserves to rise, reaching € 5.1 billion at end-September, more than double the stock of short-term debt. The debt burden continues to lessen, with the external debt-to-GDP ratio standing at 62 percent, well below the end-2002 level of 70 percent. Reflecting these gains, spreads on the Bulgaria component of the EMBI+ index have dropped below 200 basis points.

4. Our strong economic performance has been supported by a sound fiscal policy. A significant overperformance in revenue collection allowed us to respond to the rapid rise in private sector demand and the widening of the external current account deficit while still meeting critical expenditure needs. By saving a significant portion of additional revenue, we expect to have achieved at least a balanced budget for the year. In addition, due to expenditure savings in some areas, we were able to undertake additional unbudgeted expenditures, including to fully fund central government-mandated municipal expenditures and clear overruns on medicine reimbursements and hospital arrears, and on wages and pensions. We are taking steps to limit hospital arrears in the future (see paragraph 13).

5. We have made further progress with public sector reforms aimed at keeping our fiscal policy on a sound footing over the medium term. We are pressing ahead with implementation of the National Revenue Agency (NRA). A draft Bulstat law, which regulates the use of the Bulstat number as the single key identification for all tax operations, has been submitted to Parliament. We intend this law to be passed by April, 2004, and to come into effect by mid-2004. We have improved the budget process, including by introducing program budgeting in three ministries. We are proceeding as well with our reform of intergovernmental finances, and to this end have passed the revised municipal budget act, and developed standards necessary for assessing the cost of government mandates.

6. Other structural reforms have advanced as well--notably with bank privatization and in the energy sector--but progress in some areas has proved more challenging. We sold the last large government-owned commercial bank (DSK). The sale of the telecommunication company (BTC) is at the final stage of implementation. Only technical problems impede the procedure's finalization, but we expect to conclude the transaction in the very near future, without canceling the current procedure. The sale of the tobacco holding (Bulgartabac), however, is taking considerably longer than initially envisaged. In the energy sector, we have raised electricity and district heating prices toward cost-recovery levels, passed a new Energy Law, and have started to evaluate bids for the majority shares in seven electricity distribution companies. Recent policies to strengthen the legal system and rationalize licensing regimes have improved the business climate. However, reforms to restructure the health sector have proved more difficult.

C. Economic Policies for 2004

7. We see economic prospects for 2004 and the medium term as favorable, but subject to significant risks. Our targeted real GDP growth of 4½ percent in 2003 was likely achieved, and with global economic prospects improving, we expect growth to rise to 5¼ percent in 2004. Inflation should remain subdued at about 4 percent. We expect growth in claims on the nongovernment sector to decline to about 20-25 percent in real terms by end-2004. Private consumption and investment should remain robust, and the extent of narrowing in the current account deficit would be commensurately limited, with the deficit projected to reach 7¼ percent of GDP by end-2004, from about 7¾  percent at end-2003. We anticipate net foreign direct investment (FDI) to cover some three quarters of the current account deficit. We are mindful, however, that our external position could worsen if private sector credit and import growth fail to moderate as expected, if recent gains in FDI are not sustained, or if other capital flows reverse. Further, while the banking system remains sound and financial oversight strong, we recognize that continued rapid credit growth presents new challenges for banking supervision.

8. Our policies will continue to be focused on limiting the economy's vulnerability to risks and on achieving sustained and rapid economic growth. Fiscal policy must remain cautious and flexible; the health of the financial sector safeguarded; and structural reforms pursued to remove remaining obstacles to growth and to allow the implementation of the government's medium-term fiscal strategy.

Fiscal Policy and Public Sector Reforms

9. The 2004 budget is aimed at containing external pressures while meeting key expenditure needs and continuing to reduce the tax burden. We have targeted a small deficit of 0.7 percent of GDP for 2004--a modestly expansionary fiscal stance compared with the 2003 outcome. In our view, this stance is consistent with macroeconomic stability, and will support a narrowing of the external current account deficit and allow a further modest decline in the external debt-to-GDP ratio. Key features of the budget are noted below. Passage of a budget targeting a deficit of 0.7 percent of GDP is a prior action for Board consideration of the review.

  • Social spending--including on health care and education--is increasing as a share of the total budget and as a percentage of GDP.

  • Public investment will rise modestly to 3½ percent of GDP, with a focus on infrastructure required for EU accession.

  • Public sector wages will rise by 8.5 percent in July.

  • Pensions will increase by 5.8 percent in June, and the ceiling on maximum pensions has been raised from 250 leva to 420 leva per month. The share of social security contributions going to second pillar pension funds has increased from 2 to 3 percent.

  • The corporate tax rate has been reduced from 23.5 to 19.5 percent, while selected excise taxes were raised further toward EU levels. The personal income tax rate for the lowest income bracket has been lowered from 15 to 12 percent, and minimum income exempted from taxation has been raised from 110 to 120 leva.

  • In order to create room for the corporate and personal tax cuts and additional social and EU accession-related spending, we will step up our efforts to improve tax administration, and contain government subsidies, including for railways, district heating and hospitals.

  • The 2004 budget also incorporates a maximum of 500 million leva of Fiscal Reserve Account (FRA) resources to finance a road fund. The release of these resources is dependent on the findings and follow-up discussion of a World Bank review paper of expenditure needs and priorities in the road sector, and would only be effected in the second half of the year if macroeconomic conditions permit. Such spending would also only be made in consultation with IMF staff, including in the context of a successor precautionary Stand-By Arrangement, which we intend to request.

  • We plan to establish a state-owned forestry enterprise, to be capitalized with 44 million leva, in FRA resources. In this regard, we are seeking to agree with the World Bank on the modalities. We also envisage to transfer a total of 23 million leva in FRA resources to the state-owned environmental enterprise (which was created prior to the benchmark prohibiting the creation of new state-owned enterprises and extrabudgetary funds) and the energy efficiency enterprise, (which will be created later in 2004) .

10. We are taking steps to ensure that fiscal policy remains sufficiently flexible to adjust to any adverse developments in our external position. We will continue our practice of proceeding cautiously with discretionary spending. We will limit spending to 93 percent of budgeted amounts in the first three quarters of the year, including from spending units' own revenues, and have built these limits explicitly into our Treasury Single Account (TSA). This provides us with the flexibility to adjust fiscal policy by up to one percent of GDP if the external position fails to improve. Such adjustments would be made in consultation with IMF staff. Additional flexibility is provided by budget contingencies equivalent to 0.6 percent of GDP. Finally, we view our revenue projection as conservative and will save most of the revenue overperformance in 2004, unless external conditions improve significantly, subject to the commitment in the budget that the first BGN 25 million of any revenue performance be directed to tobacco, agriculture, and railway subsidies.

11. We will strengthen our public sector reform effort, which is crucial to achieving our medium-term fiscal goals. First, we will implement measures to improve tax administration. We intend to have the NRA operational by January 1, 2005. Toward this end, we have established a pilot NRA project in Burgas, expect to have chosen revenue administration software for the NRA by end-February 2004, and plan to continue conducting joint National Social Security Institute (NSSI) and GTD audits. During 2004, we plan to develop integrated work processes of the tax administration and the NSSI for the purposes of the NRA. We anticipate receiving technical assistance from the Fund in this area in early 2004. We will continue to enhance our budgeting and expenditure management including by extending program budgeting to an additional four ministries in the 2005 budget process. Three out of five modules of the Financial Management Information System (FMIS) have been rolled out in the Ministry of Finance and all its second level spending units. The newly-established steering committee will decide on the next steps to make the system fully operational. The extension of the coverage of the TSA to all leva-denominated extrabudgetary funds has been delayed owing to technical problems, but we intend to complete this process by end-June 2004.

12. We are making major advances in our system of intergovernmental finances. First, in the 2004 budget, we have--in contrast to recent years--fully funded all mandated local government spending. In addition, we are preparing legislation pertaining to municipal and state properties and municipal debt. We are developing standards for assessing the costs of municipal mandates. With these measures implemented, we are well-placed to enforce hard budget constraints on municipalities and, in this context, will not clear any municipal arrears accumulated during 2004 and will strictly enforce the prompt payment of municipal obligations to public utilities.

13. We are determined to enhance efficiency in health spending. We aim to increase the share of hospital spending covered by the National Health Insurance Fund (NHIF) from 33 percent in 2003 to 45 percent in 2004. Municipal hospitals will receive additional financing from the Ministry of Health, also on a fee-for-service basis. These financing mechanisms will provide financial incentives for enhanced efficiency and quality of hospital care. To limit cost overruns on medicines we have established a positive list of medicines covered by the NHIF and introduced co-payment for selected medicines.

Financial Sector Policies and Debt and Asset Management

14. While the recent growth of financial intermediation in Bulgaria is a welcome development, we recognize that rapid credit growth presents new challenges for banking supervision. Bulgaria's banking sector remains sound, but credit growth at the current pace brings with it risks of a future deterioration of bank asset quality. In addition, the rapid rise in lending, including to households, is fueling the ongoing import boom, increasing Bulgaria's external vulnerability.

15. In response to these risks, the BNB has developed a comprehensive strategy consisting of a set of sequential measures, with its implementation dependent on observed developments in credit growth. As a first step, we have already conducted discussions with major banks to ensure that lending standards are not being relaxed in an effort to maintain or expand market share. We have also reduced the test period for classifying loans as loss from 180 to 120 days, and have postponed plans to reduce banks' reserve requirements toward EU norms. Although credit growth has already slowed down in the last few months--a trend we expect to persist--we continue to implement our strategy:

  • We have reached understandings on business strategies with selected banks containing specific steps to ensure that credit growth returns to more sustainable levels. The implementation of such strategies will be monitored by the BNB.

  • We have strengthened our monitoring of loan portfolio quality, including by raising the frequency of on-site inspections of particularly aggressive banks. In this regard, we will require more frequent reporting by such banks. To facilitate this, we hired a number of new inspectors in the latter part of 2003.

  • To improve lenders' ability to assess credit risk, we have adopted regulations to remove the 10,000 leva reporting threshold for banks to the credit registry so that all loans will be registered.

  • We have announced a further reduction--effective April 1, 2004--in the test period for classifying loans as loss, from 120 to 90 days, matching best international practice. This announcement is a prior action for consideration of the review by the Executive Board.

  • If, contrary to expectations and despite these measures, credit growth does not continue to decline, we will increase the frequency and scope of reviews of banks and reexamine their business strategies. We will also continue to apply the measures envisaged in our strategy to influence credit growth, including increasing liquidity requirements on a bank-by-bank basis.

16. The government, in its asset management, will also remain cognizant of the need to contain credit growth within sustainable levels. In this context, the government will return the remaining deposits that were auctioned off to commercial banks in mid-2003 to the BNB as they mature, or more rapidly if necessary, and will not repeat similar operations in 2004. Moreover, any funds transferred to the state highway enterprise, as well as funds from the Bank Consolidation Company, will be deposited in the BNB. The Ministry of Finance and the BNB have agreed on draft amendments to the Organic Budget Law with the aim of improving coordination and transparency of the management of FRA resources.

17. We will carry on with our active public debt management, with a view to continuing to reduce external vulnerability and deepen the domestic securities market. In line with our debt management strategy adopted in March 2003, our objectives remain to achieve a more balanced interest and currency composition of the debt and increase the share of domestic debt, while continuing to lower the public debt-to-GDP ratio. A portion of the assets accumulated in the FRA could be utilized for prepayments and debt reduction operations.

18. We have also continued to make progress in implementing the measures recommended in the Safeguards Assessment report. We have established a risk-based methodology for the BNB's Internal Audit Department, ahead of schedule. We are also making good progress in developing an audit procedures manual for the internal audit function, which we intend to complete by the end-March 2004 deadline.

Other Structural Reforms

19. We are committed to stepping up our efforts to improve Bulgaria's business climate and attract higher FDI on a sustainable basis. We plan to improve administrative services for foreign and domestic investors through one-stop shops, and by enhancing the infrastructure available to large investors. With the assistance of the EU and World Bank, we have accelerated the reform of the judiciary and improved governance by amending the nation's constitution to limit the immunity of members of the judiciary, to provide for their replaceability in certain defined circumstances, and to limit their terms in office. With regard to Bulgartabac, our new strategy--focused on selling components of the company instead of the entire holding--was approved by parliament in December 2003, and we anticipate completing the sale of several Bulgartabac companies by mid-2004.

20. Reforms in the energy and railway sectors remain critical to our medium-term fiscal strategy and for removing remaining impediments to growth. Our new energy law provides a modern framework for the energy sector in Bulgaria. The sale of the electricity distribution companies is expected to be complete by mid-2004. We are continuing, with World Bank assistance, to reform the railways sector; we are committed to reaching our objective of a 10 percent reduction in personnel compared to 2001, and have raised intercity passenger tariffs to 76 percent of cost-recovery levels (compared to the benchmark of 70 percent agreed with World Bank). However, we recognize that a successful reform of the railways will require the government to make explicit decisions about the limited set of activities to be subsidized. Toward this end, we have separated the accounts for freight and passenger transport, and will sign purchase of service contracts for specific railway services in the context of the 2004 budget.

21. Our labor market policies are aimed at maintaining competitiveness and continuing to lower unemployment by reforming the labor code. We will seek to accelerate the dialogue among social partners on the proposed labor code amendments to reduce hiring and firing costs by abolishing the seniority premium, promoting flexibility in the duration of employment contracts, and increasing flexibility in employment during periods of production stoppage. We will maintain our incomes policy in regard of those state enterprises incurring the highest losses or overdue liabilities, receiving public subsidies or enjoying monopoly status. In this context, we have issued the 2004 incomes ordinance restricting the growth of the wage bill for the listed enterprises to a maximum of 4 percent for 2004, compared to the third quarter of 2003.

22. We met our objective to subscribe to the special data dissemination standards (SDDS) by end-2003.

Table 1. Bulgaria: Quantitative Performance Criteria and Indicative Targets
Under the Stand-By Arrangement, 20031
(In millions of leva, unless otherwise indicated)
Variable and Periods  Target Outcome

I.  Ceiling on the overall deficit of the general government        
     Jan. 1, 2003–Mar. 31, 2003   304.9   -109.5
     Jan. 1, 2003–Jun. 30, 2003   100.5   -627.1
     Jan. 1, 2003–Sep. 30, 2003     75.7   -858.2
     Jan. 1, 2003–Dec. 31, 2003   262.8    
II.  Floor on the balance of the fiscal reserve account        
     Mar. 31, 2003   2,400   3,442
     Jun. 30, 2003   2,400   4,229
     Sep. 30, 2003   2,400   4,399
     Dec. 31, 2003   2,400   3,849
III.  Ceiling on withdrawals from the fiscal reserve account for the acquisition of policy related financial assets Cumulative change from level on:        
     Dec. 31, 2002        
     Mar. 31, 2003     85     34.5
     Jun. 30, 2003   130     78.5
     Sep. 30, 2003   180   112.8
     Dec. 31, 2003   150   148.6
IV.  Ceiling on the wage bill of the 60 monitored SOEs        
     Jan. 1, 2003–Mar. 31, 2003   150.1   145.2
     Jan. 1, 2003–Jun. 30, 2003   150.1   139.5
     Jan. 1, 2003–Sep. 30, 2003   150.1   140.8
     Jan. 1, 2003–Dec. 31, 2003   150.1   144.4

V.  Ceiling on tax and social insurance arrearsCumulative change from level on:        
     Dec. 31, 2002        
     Mar. 31, 2003 -10   -3 -12.2   -3.6
     Jun. 30, 2003 -20   -6 -20.0   -7.3
     Sep. 30, 2003 -30   -9 -22.5 -11.1
     Dec. 31, 2003 -70 -12 -15.9 -16.2
    Up to
one year
Over 1 year (excluding Eurobonds) Up to one year Over 1 year
(excluding Eurobonds)

VI.  Ceiling on contracting and guaranteeing public sector external debt (millions of U.S. dollars)
Cumulative change from level on Dec. 31, 2002:
     Mar. 31, 2003 0 400 0 327.9
     Jun. 30, 2003 0 450 0 327.9
     Sep. 30, 2003 0 450 0 433.4
     Dec. 31, 2003 0 500 0 471.0
    Over one year (Eurobond issuance) 1-5 years Over one year (Eurobond issuance) 1-5 years

VII.  Ceiling on contracting and guaranteeing public sector external debt (millions of U.S. dollars)
Cumulative change from level on Dec. 31, 2002:
     Mar. 31, 2003     0 0 0 0
     Jun. 30, 2003 250 0 0 0
     Sep. 30, 2003 250 0 0 0
     Dec. 31, 2003 250 0    
    NEK Bulgargaz NEK Bulgargaz

VIII.  Indicative ceiling on changes to arrears owed to Bulgargaz and NEK (millions of Leva).
Maximum accumulation of new arrears from level on October 31, 2002:
     Mar. 31, 2003 0 0   2.5 0
     Jun. 30, 2003 0 0   7.1 0
     Sep. 30, 2003 0 0 10.5 0
     Dec. 31, 2003 0 0   1.1  

1Definitions of the performance criteria and indicative targets are included in the Annexes to the Supplementary Memorandum of Economic Policies.

Table 2. Bulgaria: Structural Benchmarks, 2003
 Measures   Program Timing Level of Conditions Status Review

SMEP, February 20021
1.  Initiate the publication on the Ministry of Finance website of data on monthly consolidated government budget implementation and on the Fiscal Reserve Account (paragraph 16).   End-March 2003 Benchmark Met Third
2.  Extend the operations of the large taxpayer office so as to include the group of companies that contribute at least 60 percent of tax revenue (paragraph 14).   End-June 2003 Benchmark Met Fourth
3.  Implement the Bullstat number as the single key identification for all tax operations (paragraph 16).   End-June 2003 Benchmark Not met Fourth
4.  Include all non-participating leva-denominated extrabudgetary funds and autonomous budget units in the Treasury Single Account (paragraph 16).   End-September 2003 Benchmark Partially met Fourth
5.  Make the Financial Management Information System fully operational in the Ministry of Finance (paragraph 16).   End-December 2003 Benchmark Partially met Fourth
6.  No new extrabudgetary funds or state-owned enterprises will be created during the program period (paragraph 16).   Continuous Benchmark Met Fourth
 Financial sector          
7.  Completion of the sale of DSK Bank (paragraph 23).   End-June 2003 Benchmark Met Fourth
 Energy sector          
8.  State Energy Regulatory Commission to announce increase in average household electricity prices by 15 percent (paragraph 20).   June 30, 2003 Benchmark Met Fourth
9.  Announce increase in average district heating prices by 10 percent (paragraph 20).   June 30, 2003 Benchmark Met Fourth
 SMEP, June 20032
10.  Select an information technology system and initiate a pilot in the town of Bourgas for the National Revenue Agency (paragraph 11).   End-September Benchmark Partially met Fourth

1Paragraph numbers refer to the Memorandum of Economic Policies dated February 12, 2002.
2Paragraph numbers refer to the Supplementary Memorandum of Economic Policies dated June 18, 2003.

Table 3. Bulgaria: Prior Actions for Board Consideration of the Review
Under the Stand-By Arrangement

1. Passage of a budget for 2004 targeting a deficit of 0.7 percent of GDP.
2. Announcement of a reduction--effective April 1, 2004--in the test period for classifying loans as loss, from 120 to 90 days.


Performance Criterion on the Overall Deficit of the General Government

Overall deficit ceilings


(In millions of leva)

January 1, 2003–March 31, 2003


January 1, 2003–June 30, 2003


January 1, 2003–September 30, 2003


January 1, 2003–December 31, 2003


The general government accounts are defined to comprise the consolidated budget (including the republican budget, the budgets of ministries and local governments, and the social security fund) as well as all extrabudgetary funds and accounts both at the central and local government levels.

The quarterly limits will be cumulative and will be monitored from the financing side as the sum of net credit from the banking system to the general government, including deposits and accounts abroad, net nonbank credit to the general government, privatization receipts of the budget, and receipts from external loans for direct budgetary support minus amortization paid. For calculating the performance against this ceiling, privatization receipts include the dividends the Bank Consolidation Company (BCC) distributed to the general government and taxes collected from BCC related to the sale of assets, and all the proceeds from the sale of GSM licenses. External drawings and repayments will be converted into leva at the BNB daily exchange rate. Valuation changes in deposits and accounts that are denominated in foreign currencies will be recorded daily and reported by the BNB and the Ministry of Finance at the end of each quarter, and such changes will be netted out.


Performance Criterion on the Floor on the Balance of the Fiscal Reserve Account (FRA)



(In millions of leva)

March 31, 2003


June 30, 2003


September 30, 2003


December 31, 2003


The Fiscal Reserve Account (FRA) consists of (1) the balances in leva and in foreign exchange of the following accounts: all budgetary and deposit accounts in the banking system, including the central budget, ministries and agencies, central government extrabudgetary funds as defined in Annex No. 7 of the 2003 Budget Law, the National Social Security Institute, and the Health Insurance Fund, and (2) other highly liquid foreign assets of the central government.

The following assets qualify as highly liquid foreign assets:

(i) Foreign currency deposits with foreign financial institutions (or their branches) assigned a rating of AA- or higher;

(ii) Fixed income instruments issued by supranationals and foreign sovereigns (including financial institutions) that have a rating of AA- or higher, taken at market value;

(iii) Bulgarian Brady bonds and Eurobonds (acquired as treasury stock through market transactions) taken at 95 percent of market value.

In addition, the fixed income instruments (other than the Bulgarian Brady and Eurobonds) liquidity-wise have to satisfy the following conditions:

  • The original size of any issue should be higher than euro 1 billion;

  • Holdings in the FRA should not exceed 10 percent of any issue;

  • The issue should be traded actively (on a daily basis) OTC in London, New York, or Frankfurt;

  • There should be at least 3 market-makers for the issue.

Finally, the modified duration of the entire portfolio of highly liquid assets should not be more than 4.5 years.

The limits will be monitored from the accounts of the banking system and marked-to-market data of other highly liquid foreign assets of the central government, to be provided monthly by the BNB and the Ministry of Finance. For the purposes of the program, deposit accounts and assets that are denominated in foreign currencies will be converted into leva at the December 31, 2002 exchange rates (1.88496 leva, and 0.73555 SDR per US dollar).

The Ministry of Finance will publish information on the level and composition of the FRA on the Ministry's website on a monthly basis. The information will include the overall balance of the FRA, the balance of the government deposit at the Bulgarian National Bank, and the total amount of foreign exchange denominated assets, including the highly liquid foreign assets.


Performance Criterion on the Ceiling on Withdrawals from the Fiscal Reserve Account for
the Acquisition of Policy-Related Financial Assets1


(In millions of leva)

Cumulative change from December 31, 20022  
   March 31, 2003


   June 30, 2003


   September 30, 2003


   December 31, 2003


1Policy-related assets are financial assets, including loans, equity securities, and debt securities, that are acquired for the purpose of public policy as set forth in paragraphs 7.88 to 7.90 of the Government Finance Statistics Manual, 2001.
2Net of the cumulative value of disposed policy-related assets up to the test date, including through privatization transactions.


Performance Criterion on the Wage Bill of 60 State-Owned Enterprises (SOEs)

Wage Bill of 60 SOEs


(In millions of leva)

July 1, 2002–September 30, 2002 (actual)



January 1, 2003–March 31, 2003


April 1, 2003–June 30, 2003


July 1, 2003–September 30, 2003


October 1, 2003–December 31, 2003


The ceiling on the aggregate wage bill of the 60 state-owned enterprises closely monitored for their large losses or arrears, for receiving subsidies, or for being monopolies, is two percent above the level of their aggregate wage bill in the third quarter of 2002. The wage bill is defined to include wages and payroll taxes paid by the employer.

Those enterprises that have been privatized or ceased operations will be excluded from the list for the respective test dates. Those enterprises that register profits in each of the first two quarters of 2003 will also exit the list in the second half of 2003 unless they are monopolies, have arrears, or receive state subsidies. If an enterprise is excluded from the list, the wage bill ceiling will be adjusted down by the amount of that enterprise's wage bill in the third quarter of 2002 plus 2 percent. The 60 enterprises monitored (enterprises number 1 to 17 are considered monopolies):

1.  Railway Infrastructure Company 21.  Passenger Transport EOOD 41.  Vazov Machinery Works
2.  BDZ EAD 22.  Electricity Transport-Sofia EAD 42.  Bulgartabac-Plovdiv AD
3.  Bulgargas EAD 23.  Autotransport-Sofia EAD 43.  Bulgartabac-Asenovgrad
4.  BTC EAD 24.  Burgasbus EOOD 44.  Motori Technika Agrocultu
5.  National Electric Company 25.  Bus Transport EOOD 45.  Dunarit AD
6.  TPP Varna EAD 26.  DHC-Burgas EAD 46.  Bulgarian Rivershipping EAD
7.  EDC -Varna EAD 27.  DHC Vratsa EAD 47.  Balkancar Holding
8.  EDC -G. Oriahovitsa EAD 28.  DHC-Gabrovo EAD 48.  Bulgartabac Haskovo AD
9.  NPP Kozlodui EAD 29.  DHC-Pernik EAD 49.  Bulgartabac Shumen AD
10.  TPP Bobov D 30.  DHC-Pleven EAD 50.  Bulgartabac Dupnitsa AD
11.  EDC -Pleven EAD 31.  DHC-Plovdiv EAD 51.  Sluntse EAD-Smolian
12.  EDC -Plovdiv EAD 32.  DHC-Ruse EAD 52.  Incoms Telecom Holding A
13.  EDC-Sofia City EAD 33.  DHC-Sliven EAD 53.  Brikel EAD
14.  EDC -Sofia District EAD 34.  DHC-Sofia EAD 54.  Radio Telecommunication OOD
15.  EDC -Stara Zagora 35.  DHC-Kazanluk EAD 55.  EOOD Hemus EAR
16.  TPP Maritza Iztok 2 EAD 36.  DHC-Shumen EAD 56.  Information Services AD
17.  TPP Maritza 3-Dimitrovgrad EAD 37.  Pirin Mines EAD 57.  Mina Zdravec EAD
18.  City Transport -Varna EOOD 38.  Port Burgas EAD 58.  AD Balkankar - Dunav
19.  City Transport Plovdiv EOOD 39.  Eliseina EAD 59.  Terem EAD
20.  Ruse Municipal Autotransport EOOD 40.  Bobov Dol Mines 60.  V & K EOOD - Dobrich


Performance Criteria on Ceiling on Tax and Social Insurance Arrears
  Total GTD NSSI

  (In millions of leva)
Outstanding as of:      
   December 31, 2002 (actual) 430.7 226.6 204.2
Cumulative change from level on December 31, 2002:      
   March 31, 2003 -13 -10 -3
   June 30, 2003 -26 -20 -6
   September 30, 2003 -39 -30 -9
   December 31, 2003 -82 -70 -12

These performance criteria are on the sum of changes in monitored arrears to the GTD and arrears to the NSSI. For the purpose of these performance criteria, arrears are defined to include interest and penalties. The enterprises monitored for arrears to the GTD:

1.  Neftochim 18.  Great Bulgarian Mills EAD 35.  Orfei
2.  Energokabel AD 19.  Kambana 1899 AD 36.  Chernomorsko Zlato
3.  Plama AD 20.  Bulgargaz EAD 37.  Korabno mashinostroene
4.  VMZ AD - Sopot 21.  Trema AD 38.  NITI EAD Kazanlyk
5.  Haskovo BT AD 22.  Madara AD 39.  Stara reka
6.  NEK EAD 23.  Dunarit AD 40.  Shumensko pivo
7.  Slantze BT AD 24.  Maritza KK AD 41.  Agroteknika
8.  Arcus AD 25.  Ledenika AD 42.  Vineks Preslav
9.  Sugar Factory AD 26.  Dobrich Mel AD 43.  Cherno more
10.  Pernik Mines 27.  Plovdiv BT AD 44.  Liteks Dzus
11.  Arsenal EAD 28.  Minstroi Rodopi AD 45.  Varnensko Pivo
12.  Vini EAD 29.  Pleven BT AD 46.  Kitka
13.  Bourgas Seaport 30.  Kvarz EAD 47.  Svetlina
14.  PDNG EAD 31.  Bobovo Coal Mines 48.  Burgasbas
15.  Bourgas Sugar Facory AD 32.  Nefteks Petroleum 49.  Blagoustroisveni Stroeji Burgas
16.  Dupnitsa BT 33.  Zachar Bio AD 50.  LVK Gamza
17.  Mariza - Iztok Mines 34.  Stomaneni trabi    

The enterprises monitored for arrears to the NSSI:

1.  Kremikovci AD, Sofia 34.  NITI EAD 68.  Balkankar-Zaria AD
2.  Stomana AD, Pernik 35.  Montana AD 69.  ZSK Kremikovci
3.  Port of Burgas, Burgas 36.  Sanya 70.  Simpto AD
4.  Varna Shipyard 37.  Agropromstroy EAD 71.  Semena Dobrich AD
5.  Quartz AD 38.  Dobritch Mel AD 72.  Ruen-Elit AD
6.  Gorubso Madan AD 39.  Radomir Le Co Co EOOD 73.  I. H. I KO Ahrida AD
7.  Gorubso Zlatograd AD 40.  Filtex AD 74.  Rilski Len AD
8.  Gorubso Rudozem EAD 41.  Pirin Mines 75.  Filtex AD
9.  Gorubso-ROF Rudozem AD 42.  Nistra EAD 76.  Mak Tours AD
10.  Promet EOOD, Burgas 43.  Dobruzhan Meat Company 77.  Biliana Triko AD
11.  New Plama AD 44.  Dunarit AD 78.  Zavodski Stroezhi AD
12.  Stara Reka AD 45.  Agrotehnika AD 79.  Boni Commerce AD
13.  Tezhko Mashinostroene AD 46.  Dobrich Mel 80.  Pons Holding AD
14.  Kitka AD 47.  Harmonia 81.  Kosko EOOD
15.  Beltrans EOOD 48.  Ilindentsi Mramor 82.  Varnensko Pivo
16.  CR Baza-Pernik EOOD 49.  Orfey OOD 83.  DP Construction & Transpt. Acitv. 
17.  Burgas Copper Mines 50.  Ptikom EAD 84.  Sadrujie Stoichevi 57-65
18.  Cherno More EOOD 51.  S-M 33 85.  Sokola AD
19.  Arkus AD 52.  Mediket AD 86.  Zavodski Stroezhi PC-Pernik AD
20.  Prima AD 53.  Sukmo EOOD 87.  Asenovgrad BT
21.  KK Maritsa 54.  Elena Georgieva AD 88.  Kocho Chestimenski AD
22.  Dynamo AD, 55.  Mak AD 89.  Pulpodeva AD
23.  Podem AD 56.  Rodopa-95 90.  Vagonno-remonten Zavod-Karlovo
24.  Elprom ETM AD 57.  Uvion OOD 91.  Dunarit EAD
25.  Rubin AD 58.  ZMM Technotronika 92.  LVZ AD
26.  Etavia AD 59.  Struma OOD 93.  Vini EAD
27.  Stomaneni Trabi AD 60.  Pektin EOOD 94.  Minstroi Rodopi AD
28.  Obshtinski Avtotransport
Incoms EIM
Rozhen Express EOOD
DP Construction and
29.  ZMM 63. 
V i K   Reconstruction
30.  Trema 64.  Balgarska Roza-Sevtopolis 97.  Industrial Corporation Zelin
31.  Belopal 65.  Alukom 98.  UI St. Kliment Ohridski
32.  Ustrem-Topolovgrad 66.  Niva AD 99.  Mostsroi AD
33.  Marz AD 67.  Kartal EAD 100.  Alkomet AD

For the purpose of assessing compliance with these performance criteria:

  • the measured changes in arrears will exclude the amount of principal and interest added by any new tax and social contribution assessment acts issued for arrears incurred before December 31, 2002;

  • VAT refund positions (negative outstanding liabilities) will not be netted against liabilities of other enterprises, i.e., if an enterprise has a net refund position, it will count as zero in the total tax arrears for the monitored enterprises;

  • agreements entered into after December 31, 2002 on writing off or rescheduling outstanding liabilities to tax authorities or the NSSI will not reduce amounts counted as outstanding liabilities;

  • enterprises in the list which are entered into liquidation or bankruptcy proceedings will not drop out of the monitored total until they are struck from the register of active enterprises in Bulgaria; however, the total will no longer include new interest and penalty charges accruing after their entry into bankruptcy or liquidation.

  • NEK will include all generation, transmission and distribution companies that were a part of the electricity monopoly prior to its unbundling.


Other Performance Criteria1

1. The BNB will ensure that gross foreign reserves of the issue department are at least equal to the issue department's liabilities at all times. Issue department liabilities will comprise leva notes and coins in circulation, and deposits from the banking department, banks, government, and the nonfinancial sector with the BNB, excluding liabilities to the IMF. For the purpose of this performance criterion, issue department liabilities will be converted into foreign exchange using the official exchange rate. The BNB will exclude placements from other agencies under fund management contracts from the balance sheet of the issue department.

2. The BNB shall not increase credit to the government at any time during the period of the CBA, except as allowed under the Law of the BNB, nor shall it purchase Bulgarian government securities.

3. During the period of the arrangement, the government does not intend to impose new or intensify existing exchange restrictions on payments and transfers for current international transactions, or introduce or modify multiple currency practices, nor conclude any bilateral payments arrangements that are inconsistent with Article VIII of the IMF Articles, nor impose or intensify any import restrictions for balance of payments purposes, nor accumulate any external payments arrears except for amounts subject to rescheduling agreements.

1 All performance criteria listed in this annex are applicable on a continuous basis.


Performance Criteria on the Ceilings on Contracting and
Guaranteeing Public Sector External Debt1,2
(In millions of U.S. dollars)
   One year and Under3 Over 1 year4
  1-5 years4

Cumulative change from level on December 31, 2002            
   March 31, 2003 0   400     0   0
   June 30, 2003 0   450 250   0
   September 30, 2003 0   450 250   0
   December 31, 2003 0   500 150   0

1The public sector comprises the central government, the local government, the social security fund and all other extrabudgetary funds and the Bulgarian National Bank.
2The term "debt" has the meaning set forth in point No. 9 of the IMF Guidelines on Performance Criteria with Respect to Foreign debt adopted on August 24, 2000 (Executive Board Decision No. 12274-(00/85)). Excluded from this performance criterion are (i) normal import-related financing credits; and (ii) outstanding balances under bilateral payments arrangements. Debt and commitments falling within the ceilings shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective.
3The ceilings apply to debt with original maturities of up to and including one year. The actual stock of short-term debt outstanding (according to this definition) as of December 31, 2002 was zero.
4The ceilings apply not only to "debt," but also to commitments contracted or guaranteed for which value has not been received.
5Gross value of Eurobond issuance, net of the cumulative value of own tradable external debt acquired by the general government in 2003 up to the test date, whether through separate transactions, or in a debt exchange operation. Operations will be valued at the market value on the day of the transaction. Following the end of each quarter, the Minister of Finance will report to the IMF: (i) the contracting and guaranteeing of external debt falling both inside and outside the ceilings, and (ii) the amount of own tradable external debt acquired by the general government. Following the end of each month, information on the contracting and guaranteeing of external debt falling both inside and outside the ceilings will be reported to the IMF by the Ministry of Finance.


Indicative Ceilings on Changes to Rescheduled and New Arrears Owed to Bulgargaz and NEK
  Bulgargaz NEK

  (In millions of leva)
Outstanding as of October 31, 2002 0 1.87
Maximum accumulation of new arrears from level on October 31, 2002    
March 31, 2003 0      0
June 30, 2003 0      0
September 30, 2003 0      0
December 31, 2003 0      0

1For the purpose of assessing compliance with these indicative targets:
  • Arrears are defined to include overdue payments of more than three months after the normal settlement period. Arrears are defined to include interest and penalties.

  • Arrears will not include new interest and penalties accruing for enterprises that enter into bankruptcy or liquidation nor arrears of companies that have been disconnected.

  • The indicative targets apply separately for Bulgargaz and NEK.

  • A number of public or state-owned companies or entities will be excluded from the indicative targets because they are being restructured: arrears owed by the district heating companies and public hospitals will be excluded from the indicative target for Bulgargaz, and arrears owed by the railways infrastructure company (BDZ infrastructure) will be excluded from the indicative target for NEK. All other public sector entities will be included.

  • The Ministry of Finance shall provide to the IMF detailed entity-by-entity data on the stock of arrears owed to Bulgargaz and NEK separately on a monthly basis. The submission shall comprise of all delinquent customers including those that are excluded for the purpose of assessing compliance with these indicative targets. In addition, the submission shall include brief explanations of actions taken by Bulgargaz and NEK against customers who have defaulted on the payment of rescheduled arrears.