Press Release: IMF Approves Stand-By Credit for Bulgaria
IMF News, July 19, 1996
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- Published: July 19, 1996
Approval and financing terms
- IMF approved a 20-month stand-by credit for Bulgaria equivalent to SDR 400 million (about US$582 million) in support of the Government's 1996-97 economic and financial program.
- In view of the substantial policy actions already implemented and the country's immediate need to replenish reserves, the IMF will disburse 40 percent of the total amount within the next two months.
Background: pre-crisis developments
- 1995 outcomes:
- Inflation fell sharply.
- Real GDP growth edged up.
- External current account moved into a substantial surplus.
- Causes of crisis:
- Delays in addressing financial indiscipline in the enterprise and banking sectors undermined stabilization.
- Easing of financial policies in the second half of 1995 and stalled structural reforms.
- Illiquid banks facing localized runs increasingly turned to the central bank for refinancing, generating excess liquidity.
- Liquidity spilled into the foreign exchange market while heavy official intervention sought to maintain a stable exchange rate, causing a severe fall in official reserves and a sharp decline in the value of the lev.
The 1996-97 Program: objectives and instruments
- Program aims:
- Restore macroeconomic stability.
- Fend off the present financial crisis.
- Move forcefully with long-delayed structural reforms.
- Main macroeconomic objectives:
- Achieve real GDP growth of 2.5 percent in 1997, after an expected stagnation in 1996.
- Sharply reduce inflation from 20 percent per month to 2 1/2 percent per month by end-1996, and to 1 1/2 percent per month by end-1997.
- Achieve an external current account surplus of 3.1 percent of GDP in 1996 and 2 percent of GDP in 1997.
- Increase official international reserves by 50 percent by the end of 1996 to a level that will cover over 2 1/2 months of imports of goods and non-factor services, and to 3 1/2 months in 1997.
- Fiscal strategy:
- Program centered on a substantial up-front fiscal adjustment, supported by tight monetary policy and an incomes policy.
- Authorities adopted measures to raise at least the equivalent of 2 percent of GDP in additional revenues in the second half of 1996, and to increase revenues further by 1 percentage point of GDP in 1997.
- Revenue measures include:
- Increase in the value-added tax from 18 percent to 22 percent.
- Improvement in tax administration.
- Substantial increase in excise taxes on alcohol and tobacco.
- Temporary 5 percent import surcharge on goods for final consumption.
- Expenditure measures:
- Keep noninterest expenditures, other than wages and social expenditures, as close as possible to the nominal allocations approved in the budget to achieve the equivalent of a 2 percent of GDP cut in the level of spending compared with 1995.
- Fiscal deficit targets:
- Fiscal deficit targeted to decline from 4.7 percent of GDP in 1996 to 2.6 percent in 1997.
- Authorities stand ready to take additional measures, if needed, to safeguard program objectives.
- Exchange rate and monetary policy:
- Exchange rate will be market-determined; intervention limited to rebuilding official reserves and smoothing short-term fluctuations.
- Tight monetary policy, together with fiscal consolidation, aimed at early stabilization of financial and exchange markets and correction of exchange rate overshooting.
- Incomes policy:
- Restrictive incomes policy to support monetary policy.
- Wages in the budgetary sphere capped by a nominal limit on the wage bill.
- Wages in state-owned enterprises to be adjusted for only 70 percent of the excess of inflation above 20 percent during 1996, unless productivity developments permit a larger increase.
Structural reforms
- Reforms are cornerstone of strategy and to be supported by financial assistance from the World Bank.
- Problems to address:
- Banks ill supervised.
- Majority of industrial enterprises remained state-owned.
- Utilities provided subsidized inputs and services.
- Enterprise losses had led to quasi-fiscal deficits on the order of 4-5 percent of GDP.
- Measures and expected outcomes:
- Cut enterprise losses by two thirds through liquidation and isolation of large loss-making enterprises and by privatization.
- Large administered price adjustments (including more than doubling of fuel and electricity prices over the past few weeks) to end excessive subsidization and align revenues with operating costs and investment needs.
- Banks prohibited from lending to enterprises on the isolation list and to all borrowers with overdue payments for more than three months.
- Adoption of a bank liquidation law giving the Bulgarian National Bank stronger supervisory powers.
- Privatization:
- Accelerate cash privatization.
- Enhance mass privatization so that at least 25 percent of state-owned assets will have been transferred to private ownership by end-1996 and at least an additional 25 percent next year.
Social issues and mitigation
- Costs of retrenchment from liquidation and isolation of enterprises to be financed with assistance from the World Bank.
- Medium-term strategy to improve social insurance and assistance and reduce its budgetary burden.
- Government to establish measures to better target benefits to the most needy; such a scheme already adopted in the context of recent administered price increases.
Risks, implementation and international support
- Success depends importantly on perseverance in implementing structural reforms.
- Program is subject to a number of risks, but these risks have been lessened by bold policy actions already implemented and authorities' willingness to strengthen policies as needed.
- Support of the international community is crucial to the program's success.
IMF membership and balances
- Bulgaria joined the IMF on September 25, 1990.
- Quota is SDR 464.90 million (about US$676 million).
- Outstanding use of IMF credit currently totals SDR 385 million (about US$559 million).
Bulgaria: Selected Economic Indicators (as presented)
- Real GDP growth (percent change)
- 1993: -1.5
- 1994: 1.8
- 1995: 2.6
- 1996*: --
- 1997*: 2.5
- Consumer price index (year-on-year)
- 1993: 63.8
- 1994: 121.9
- 1995: 32.9
- 1996*: 105
- 1997*: 20
- Overall fiscal balance (deficit –) (percent of GDP)
- 1993: -10.9
- 1994: -5.8
- 1995: -5.7
- 1996*: -4.7
- 1997*: (targeted) 2.6 (expressed in text as target decline from 4.7 percent of GDP in 1996 to 2.6 percent in 1997)
- External current account balance (percent of GDP)
- 1993: -12.8
- 1994: -2.1
- 1995: -2.2
- 1996*: 3.1
- 1997*: 2.0
- Gross official reserves (months of imports)
- 1993: 3.0
- 1994: 2.8
- 1995: 3.5
Source: IMF press release, July 19, 1996.