Public Information Notice: IMF Concludes Article IV Consultation with Bulgaria
IMF News, April 19, 2000
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- Published: April 19, 2000
Background and recent developments
- Currency board arrangement (CBA) introduced in mid-1997 has achieved macroeconomic stabilization and substantial structural reform progress.
- Fiscal outcomes:
- 1998: general government registered a small surplus.
- 1999: general government deficit limited to 0.9 percent of GDP.
- Inflation:
- CPI increased by only 1.8 percent (annual average) in 1999.
- Year-on-year inflation rate rose to 9.1 percent in February 2000 due to higher energy and food prices.
- Average 12-month inflation reported at 3.5 percent.
- Privatization and structural change:
- Two thirds of state assets outside infrastructure privatized since CBA introduction.
- Restructuring of large state monopolies in utilities underway.
- Four (out of seven) state banks privatized, two more on the market.
- Share of administered items in the CPI sharply reduced; trade liberalized significantly; land restitution nearly completed.
- Output and external sector:
- After rebound in second half of 1997, GDP growth reached 3.5 percent in 1998.
- A series of adverse shocks (slowdown in partner countries, weak export prices from global financial crises, Kosovo conflict in March-June 1999) caused exports to decline by one third between fall 1997 and spring 1999 and worsened the external current account deficit (from ½ percent of GDP in 1998 to over 7 percent of GDP in the first half of 1999).
- Recovery underway from second half of 1999; Q3 1999 GDP grew by 4.5 percent year on year.
- 1999 full-year GDP growth estimated at 2.5 percent.
- Current account deficit held to 5.4 percent of GDP in 1999.
- Authorities' targets for 2000: GDP growth of 4 percent and a current account deficit of no more than 4 percent of GDP; export growth expected to reach double digits.
Key challenges highlighted
- Labor market and social conditions:
- Unemployment: declined to 12 percent in 1998, rose substantially during 1999, reached 18 percent in February 2000.
- Poverty remains widespread, especially among pensioners and in less developed regions.
- EU accession and structural reform agenda:
- Bulgaria's per capita income is the lowest among the 12 candidate countries; many years of very rapid growth required to catch up.
- Remaining reforms needed to develop a fully competitive market economy.
- State-owned sector needs higher financial discipline; liquidation and bankruptcy procedures still being established.
- Emerging private sector faces burdensome bureaucracy, weak governance, and a banking system hesitant to extend credit.
- Sovereign credit rating remains well below investment grade.
- Cumulative foreign direct investment at less than US$200 per capita.
Executive Board assessment — findings and policy recommendations
- Overall assessment:
- Directors commended authorities for sound policies that brought macroeconomic stability and helped weather severe shocks.
- Prudent fiscal and incomes policies and accelerated structural reforms helped curb the current account deficit, maintain competitiveness, and initiate a rebound in activity and exports.
- Immediate challenge: ensure recovery becomes self-sustaining and reduce unemployment and poverty.
- Long-term challenge: achieve rapid growth for EU accession and further develop a competitive market economy.
- Fiscal policy:
- Directors endorsed broadly unchanged fiscal stance in 2000.
- 2000 budget allowed a general government deficit of up to 1.5 percent of GDP, including transitional costs of structural reform.
- Importance of tight expenditure discipline, including at the municipal level, to preserve margins.
- Revenue administration and treasury:
- Welcome initial steps to create a unified revenue agency to collect taxes and social contributions; once fully operational it should markedly enhance revenue collection capacity and promote good governance.
- Urged authorities to ensure success of the unified revenue agency.
- Encouraged expeditious completion of the treasury project to strengthen budgetary control.
- Social security and public finances:
- Pension and health reforms described as appropriately ambitious.
- Adequate provisions made in the 2000 budget to cover transitional costs, but authorities urged to adjust underlying parameters further as needed to preserve long-term viability of social security funds.
- Labor market and wages:
- Stressed importance of wage moderation and flexible labor markets to maintain competitiveness and reduce unemployment.
- Real wage increases should be kept within productivity gains.
- Supported authorities' decision to continue wage bill freezes for the worst-performing state enterprises and state monopolies.
- Encouraged easing restrictions on employment and working hours in the context of an amended Labor Code.
- Urged consideration of lowering currently high social contribution rates in the medium term, contingent on improved compliance from the unified revenue agency.
- Financial sector and credit:
- Welcomed progress in banking supervision; noted private sector bank credit remains low.
- Recommended improving financial intermediation by:
- Selling remaining state-owned banks to strategic investors.
- Establishing a fully operational central credit registry.
- Strengthening enforcement of contracts and legislation.
- Endorsed planned reduction in the minimum reserve requirement to help reduce interest rate spreads and maintain liquidity.
- Structural reform priorities:
- Rapid progress in structural reform critical for medium-term growth.
- Urged vigorous implementation of initiatives across a wide front and sale of remaining large-scale commercial state enterprises during 2000 to strong strategic investors while ensuring competition.
- Supported the adoption of the new Energy Law, but stressed strict and timely implementation.
- Expressed concern about plan to freeze prices of electricity and district heating, noting possible reduction in energy reform momentum and extra budgetary pressures.
- Called for formulation and implementation of a plan for fundamental restructuring of district heating companies and the coal sector.
- Urged further efforts to strengthen public administration to improve public service delivery and implementation capacity.
- Business climate and governance:
- Urged authorities to implement recommendations of a high-level working group to reduce administrative inefficiencies as a priority.
- Emphasized importance of enforcing existing laws and private contracts, streamlining bankruptcy and liquidation procedures, and implementing accounting standards stringently.
- Transparency, technical assistance, and statistics:
- Commended authorities' efforts to enhance transparency, including publication of a Report on the Observance of Standards and Codes and implementation of its recommendations.
- Encouraged continued use of IMF technical assistance where the Fund has comparative advantage.
- Welcomed Bulgaria's interest in participating in the General Data Dissemination System.
Bulgaria: Selected Economic Indicators (as reported)
- Real economy (Percent change)
- Real GDP 2/: 1996 -10.9; 1997 -6.9; 1998 3.5; 1999 2.5; 2000 1/ 4.0
- CPI, 12-month: 1996 310.8; 1997 578.5; 1998 1.0; 1999 6.2; 2000 1/ ...
- Unemployment rate (percent): 1996 12.5; 1997 13.7; 1998 12.2; 1999 16.0; 2000 1/ ...
- Public finance (In percent of GDP)
- General government balance: 1996 -12.7; 1997 -2.5; 1998 0.9; 1999 -0.9; 2000 1/ -1.4
- Public debt: 1996 105.8; 1997 110.4; 1998 80.2; 1999 87.7; 2000 1/ 79.4
- Money and credit (Percent change, end of year)
- Real broad money: 1996 -45.4; 1997 -32.3; 1998 8.6; 1999 4.9; 2000 1/ 8.3
- Real credit to the non-government sector: 1996 -20.6; 1997 -56.0; 1998 5.3; 1999 3.4; 2000 1/ 11.3
- Interest rates (annualized) (In percent)
- BNB basic rate (end-month average): 1996 435.0; 1997 7.0; 1998 5.2; 1999 4.6; 2000 1/ ...
- Time deposits (end-month average): 1996 213.8; 1997 3.0; 1998 3.3; 1999 3.2; 2000 1/ ...
- Balance of payments (In millions of U.S. dollars)
- Gross official reserves: 1996 793; 1997 1.6 (in months of GNFS imports); 1998 2,468; 1999 3,056; 2000 1/ 6.1; 3,222; 6.0; 3,476
- Current account (percent of GDP): 1996 0.2; 1997 4.4; 1998 -0.5; 1999 -5.4; 2000 1/ -4.0
- Trade balance (percent of GDP): 1996 1.4; 1997 3.9; 1998 -3.1; 1999 -8.7; 2000 1/ -7.0
- Exchange rates
- Exchange rate regime: Currency board since July 1, 1997 3/
- Present exchange rate (March 20, 2000): 2.0132 leva/U.S.$
- Nominal effective exchange rate (1995=100) 4/: 1996 56.9; 1997 5.6; 1998 5.4; 1999 5.8
- Real effective exchange rate (1995=100) 4/ 5/: 1996 86.0; 1997 105.0; 1998 122.7; 1999 122.1
Notes and technical points from the PIN
- The 1999 GDP figure is an estimate.
- 2000 figures are projections where indicated by 1/.
- Currency board arrangement details:
- Fixed the exchange rate at 1,000 leva = 1 DM through end-1998 and 1,955.83 leva = 1 euro since January 1, 1999.
- On July 5, 1999, the lev was redenominated by removing three zeroes; as a result, one lev now equals one deutsche mark.
- Nominal and real effective exchange rates use 1995=100; real effective exchange rate is CPI-based.
Public Information Notice: IMF Concludes Article IV Consultation with Bulgaria (April 19, 2000).