## Press Information Notice: IMF Concludes Article IV Consultation with Bulgaria

_IMF News, July 29, 1997_

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## Bibliographic details
- Published: July 29, 1997

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### Background and crisis overview
- The IMF Executive Board on July 23, 1997 concluded the 1997 Article IV consultation with Bulgaria.
- Root causes of the severe financial crisis:
  - Slow pace of structural reform and financial indiscipline in the enterprise and banking sectors.
  - State ownership of most industrial production and the banking system, allowing loss-making enterprises to be kept afloat by bank credit.
  - Growth of public indebtedness as enterprise and bank losses spilled onto the budget, compounding a heavy external debt burden and exposing the economy to currency crises.
- Timeline and key developments:
  - 1991–92: Initial liberalization of prices, the exchange rate, and interest rates; structural reforms subsequently stalled.
  - Late 1995: Public awareness of weak banks triggered deposit withdrawals and shifts into foreign currency; foreign exchange reserves fell rapidly.
  - 1996 crisis outcomes:
    - Real GDP fell by 11 percent.
    - Lev depreciated from 71 per U.S. dollar at end-1995 to 487 per U.S. dollar at end 1996.
    - 12-month inflation accelerated sharply to 311 percent.
    - Foreign exchange reserves fell to US$0.5 billion, equivalent to less than one month of imports.
    - By end-year the worst banks, representing almost one-third of total deposits, had been closed.
  - Early 1997: Political crisis, resignation of the government, hyperinflation in February 1997 with monthly inflation reaching 243 percent.
  - Caretaker government adopted a comprehensive economic program centered on prospective introduction of a currency board arrangement (CBA); program accelerated privatization and liberalization.
  - March–June 1997 outcomes following program implementation:
    - Lev rebounded from around leva 3,000 per U.S. dollar in early February to leva 1,500 per U.S. dollar in March.
    - Inflation decelerated to 12.7 percent in March and then to rates averaging less than 2 percent per month in April through June.
  - May–July 1997:
    - Newly elected government reaffirmed commitment to CBA.
    - CBA established on July 1 with the lev pegged at 1,000 per DM.
    - Parliament adopted a budget consistent with the CBA.
    - By mid-July, foreign exchange reserves had increased to US$1.5 billion.
    - Yields on three-month government securities had fallen to 6.3 percent per annum.

### Executive Board assessment — overall message
- Directors noted an excellent opportunity to reinvigorate and complete reforms after costly delays in transition.
- Commendations and encouragement:
  - Authorities' commitment to reform and efforts to stabilize the economy, including implementation of the CBA.
  - Market responses: stronger than expected declines in interest rates and inflation.
  - Steps to improve banking soundness and passage of a budget consistent with CBA provided a firm foundation for consolidation.
- Cautionary emphasis:
  - No room for slippage or complacency; significant risks remain.
  - Any weakening of resolve could erode credibility and confidence and jeopardize macroeconomic stabilization.

### Executive Board assessment — specific policy priorities and risks
- Currency board arrangement (CBA):
  - Swift adoption seen as strong signal of commitment to financial discipline.
  - Durability of CBA depends on strict adherence to the new Law of the Bulgarian National Bank and sustained discipline across the budget, incomes policy, and strengthened governance in banking and enterprise sectors.
  - Failure in these areas could result in loss of competitiveness, rising interest rates, and economic slowdown.
- Fiscal policy and budgetary discipline:
  - Concern that the 1997 budget passed by parliament was weaker than initially programmed, but still consistent with objectives of no central bank or banking system financing.
  - Importance of strict adherence to the budget to progress toward a broadly-balanced budget in 1998.
  - Several Directors recommended using savings from lower-than-programmed interest rates and payments to reduce the overall deficit rather than increase spending.
  - Ambitious target for the Fiscal Reserve Account (FRA) was deemed essential and should be achieved without excessive borrowing.
  - Poor revenue performance viewed as a key budget risk; urgent need to improve tax administration, broaden the tax base, and increase efficiency.
  - Planned review of the tax system welcomed as opportunity for comprehensive tax measures in the 1998 budget.
  - Need to improve taxation of the private sector and strengthen collection of tax arrears.
  - Continued expenditure restraint and better targeting of the social safety net recommended; streamlining public administration urged.
  - Importance of timely adjustments to administered prices to keep subsidies within budgeted limits.
  - Several Directors questioned whether adequate account had been taken of the likely fiscal impact of banking sector problems.
  - A few Directors advocated reducing nonproductive expenditures to free resources for operations and maintenance, infrastructure, and social sectors.
- Labor market, incomes policy, and competitiveness:
  - Maintaining cost competitiveness crucial for foreign investment and export-led growth.
  - Strict implementation of incomes policy applying to state-owned enterprises (SOEs) necessary.
  - Wages in SOEs had recovered quickly; further increases should be limited to profitable enterprises that are increasing productivity.
  - Concern about serious unemployment; call for early actions including measures to improve education and training.
  - Over the medium term, policies should maintain and enhance labor market flexibility to promote employment, high productivity growth, and adjustment under the CBA.
- Enterprise and banking sector reform:
  - Essential for durable stabilization; implementation of structural reforms supported by the Stand-By Arrangement and World Bank Financial and Enterprise Structural Adjustment Loan crucial.
  - Authorities committed to privatize all state banks, commercial state enterprises, and half of the utilities within the next two years — viewed as necessary and encouraging.
  - Urgency noted for privatization or liquidation of loss-making enterprises; suggestion to accelerate privatization of remaining utilities.
  - Privatization should proceed transparently with strong regard for governance and efficiency; establishment of effective legal and regulatory frameworks and improvement in business practices essential.
  - Strict financial discipline on banks and state enterprises and effective restructuring of the financial system essential to avoid re-emergence of quasi-fiscal deficits and ensure effective functioning of the CBA.
  - Fundamental turnaround in bank governance required to prevent recurrence of bad loans.
  - Passage of amendments to the Law of Banks, which strengthened central bank supervisory powers, viewed as an important step; full implementation of the strengthened supervisory framework critical so reflow of resources into the banking system is used wisely.
  - Further liberalization of financial markets, including removal of obstacles to overseas investment, important to prevent accumulation of excess liquidity in the banking system.
  - A few Directors raised the possibility of increasing reserve requirements for prudential purposes while prudential standards were being strengthened.
- Governance, rule of law, and anticorruption:
  - Vigorous pursuit of fighting corruption and organized crime encouraged.
  - Respect for the law and effective institutions seen as crucial for civil society development and proper functioning of a market economy.
- Trade and exchange regime liberalization:
  - Commended maintenance of a liberal trade and exchange regime and steps to liberalize trade and prices in energy and agricultural sectors, including lifting of export bans on agricultural products.
  - Encouraged phasing out the temporary export tax on cereals and the import surcharge as soon as possible.
  - Welcomed removal of restrictions: profit remittances by small enterprises, limit on foreign exchange purchases for tourism, and maturity restriction on inward portfolio investments.
  - Urged completion of liberalization of the exchange and trade system.
- Support and further assistance:
  - Directors welcomed the interest of the new government in a successor extended arrangement to support deepening of structural reforms.

### Key statistics — Bulgaria: Selected Economic Indicators (as presented)
- Domestic Economy (change in real GDP):
  - 1993: -1.5
  - 1994: 1.8
  - 1995: 2.1
  - 1996¹: -10.9
  - 1997²: -7.4
- Unemployment rate (end of period):
  - 1993: 16.4
  - 1994: 12.8
  - 1995: 11.6
  - 1996¹: 12.5
  - 1997²: . . .
- Change in consumer prices (end of period):
  - 1993: 63.8
  - 1994: 121.9
  - 1995: 32.9
  - 1996¹: 310.8
  - 1997²: 566
- External Economy (in millions of U.S. dollars³):
  - Exports, f.o.b.:
    - 1993: 3727
    - 1994: 3935
    - 1995: 5345
    - 1996¹: 4881
    - 1997²: 5046
  - Imports, f.o.b.:
    - 1993: 4612
    - 1994: 3952
    - 1995: 5224
    - 1996¹: 4673
    - 1997²: 4841
  - Current account balance:
    - 1993: -1386
    - 1994: -203
    - 1995: -59
    - 1996¹: 117
    - 1997²: 74
  - Direct investment:
    - 1993: 40
    - 1994: 105
    - 1995: 82
    - 1996¹: 100
    - 1997²: 430
  - Capital account balance:
    - 1993: -180
    - 1994: 29
    - 1995: 253
    - 1996¹: -944
    - 1997²: 375
  - Foreign exchange reserves:
    - 1993: 655
    - 1994: 1002
    - 1995: 1236
    - 1996¹: 483
    - 1997²: 1638
  - Current account balance (in percent of GDP):
    - 1993: -12.8
    - 1994: -0.5
    - 1995: 1.3
    - 1996¹: 0.8
- Change in real effective exchange rate (in percent)⁴:
  - 1993: 33.7
  - 1994: -0.3
  - 1995: 14.7
  - 1996¹: -37.7
- Financial Variables (in percent of GDP³ or percent where noted):
  - General government balance:
    - 1993: -5.8
    - 1994: -6.4
    - 1995: -13.4
    - 1996¹: -6.3
  - Change in broad money (in percent):
    - 1993: 47.6
    - 1994: 78.6
    - 1995: 39.6
    - 1996¹: 124.5
    - 1997²: 245.4
  - Interest rate (one-month time deposits, in percent)⁵:
    - 1993: 53.6
    - 1994: 72.3
    - 1995: 25.3
    - 1996¹: 211.8

Notes:
- 1 Preliminary.
- 2 IMF staff estimates.
- 3 Unless otherwise noted.
- 4 (+) = appreciation.
- 5 One-month time deposits.

*Public Information Notice: IMF Concludes Article IV Consultation with Bulgaria — July 29, 1997; IMF EXTERNAL RELATIONS DEPARTMENT, Public Affairs, Media Relations.*

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## References

- [Bulgaria and the IMF](http://www.imf.org/external/country/BGR/index.htm)
- [Public Information Notices](https://www.imf.org/en/news/searchnews)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn9715_