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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.
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Sofia, Bulgaria, August 18, 2000

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

Dear Mr. Köhler,

The Government of Bulgaria has continued to implement sound stabilization and reform policies under the three-year economic program supported by the extended arrangement. Our fiscal performance has been stronger than programmed, and we were able to observe all end-June 2000 performance criteria, with the exception of signing a contract to sell Biochim bank. We had chosen a preferred bidder for this bank well ahead of the deadline, but in the end could not accept the bidder owing to the nature of its shareholder structure. We will issue a new tender in September, and expect to sign a sale contract early next year.

Our sustained strong efforts over the past several years are now bearing fruit as Bulgaria’s economy is experiencing a solid recovery, with good prospects for this and next year. Driven by double-digit export growth and buoyant private investment, we expect GDP growth of 4.5 percent this year and 5 percent next year, with inflation and the external position under control.

Encouraged by the positive results from our strong efforts, we are determined to stay on course. The attached Memorandum on Economic Policies of the Government of Bulgaria describes the progress made and measures that we will implement during the final year of our three-year program. These measures are designed to ensure that the recovery becomes self sustaining and that Bulgaria moves rapidly toward a fully competitive market economy. On the basis of performance under the arrangement so far and the policies described in the Memorandum, we request the completion of the fourth review under the arrangement and a waiver of nonobservance for the end-June 2000 structural performance criterion on signing a contract to sell Biochim.

The Government of Bulgaria believes that the policies described in the Memorandum are adequate to achieve the objectives of its economic program, but stands ready to take additional measures as necessary to keep the program on track. The government will remain in close consultation with the IMF in accordance with the Fund’s policies on such consultations.

Sincerely yours,

Muravei Radev
Minister of Finance
Svetoslav Gavriiski
Governor, Bulgarian National Bank


Attachment: Memorandum on Economic Policies of the Government of Bulgaria


Memorandum on Economic Policies
of the Government of Bulgaria

A.  Introduction

1.  Having faced severe shocks in the previous two years, we are now experiencing a solid economic recovery. In 1998–99, the global financial crises and the Kosovo conflict weakened our exports and suppressed economic growth. In addition, production in many enterprises was disrupted owing to intensive privatization and restructuring. This has inevitably raised unemployment. However, as the impact of these shocks has diminished, in 2000 exports have increased sharply, by 23 percent in U.S. dollar terms in the first four months year on year, and economic activity has strengthened, with first-quarter GDP 4.8 percent higher than a year ago. Inflation and the current account deficit remain under control, although both have exceeded our earlier projections somewhat, primarily because of the marked increase in world energy prices over the past year. Prices increased by 2.6 percent during the first half of the year, and the current account deficit in the first four months was US$374 million, compared with US$341 million in the corresponding period a year ago. Confidence in the lev and the currency board arrangement (CBA) remains strong, with gross official reserves at US$3.1 billion and the fiscal reserve account at US$1.4 billion at end-June.

2.  The recent positive developments are the result of our continued efforts at stabilization and reform under our CBA-based strategy. Fiscal performance has been very strong as the general government registered a surplus of 487 million leva (1.9 percent of annual GDP) in the first half of this year. Incomes policy for state enterprises has been implemented strictly, with the total wage bill of the worst-performing companies continuing to decline. We have also made substantial progress in our efforts to privatize some of the largest banks and enterprises in Bulgaria, and the separation of the electricity monopoly into its generation, transmission, and distribution components was implemented.

3.  We remain fully committed to sound economic policies in the framework of our three-year adjustment and reform program (July 1998–June 2001) which the IMF supports under the extended arrangement. The remainder of this memorandum sets out in detail our economic objectives and policies for the period ahead.

B.  Macroeconomic Objectives and Policy Framework

4.  Our main medium-term objectives continue to be sustained GDP growth of at least 5 percent per annum and a fully competitive market economy. These are key to lowering unemployment, reducing poverty, and moving Bulgaria toward EU accession.

5.  For 2000–01, we have updated our objectives in light of recent developments (see tabulation below). Based on the strong activity early in the year and good prospects for tourism, we now project GDP growth of 4.5 percent in 2000. With an expected favorable external environment and productivity gains from enterprise restructuring, an even higher growth rate of 5 percent should be feasible next year. We have raised this year’s inflation forecast somewhat to reflect the impact of higher world oil prices and the strengthening of the U.S. dollar, but in the absence of further oil price shocks we project inflation to decline to some 3.5 percent next year. Regarding the balance of payments, we aim at reducing the current account deficit in 2000 by some ¾ percent of GDP to 4½ percent of GDP, with a significant further decline targeted for next year. The fiscal and foreign exchange reserves should remain at comfortable levels in both years.

  Actual   3rd Review Proj.   Proj.

GDP growth (real; in percent)

2.4   4.0 4.5   5.0
CPI inflation
   (end of period; in percent)
6.2   3.5 6.0   3.5
Gross official reserves
   (end of period; in billions of US$)
   (end of period; in months of imports)

External current account deficit
   (in percent of GDP)

5.4   4.0 4.5   3.9

Fiscal reserve account
   (in billions of US$)

1.3   1.3 1.1   1.0

6.  To achieve these objectives, we will continue to follow our CBA-based adjustment strategy which is increasingly showing positive results. Hence, we will implement prudent fiscal and incomes policies to underpin the CBA and preserve competitiveness, and vigorous structural reforms to promote private sector initiative and investment. Our priorities in the structural area include completing the privatization program in non-infrastructure areas, restructuring the large monopolies (especially in the energy sector), ensuring the success of ongoing major institutional reforms (including in health care and pensions), creating a better business climate, and promoting a sound financial sector. Given the unavoidable side effects of rapid reform, especially the increase in unemployment, our economic program for the coming year also includes measures to mitigate the impact of adjustment on the most vulnerable groups of society, through employment programs and expanded social assistance. The subsequent sections of this memorandum outline our policy initiatives in the various areas, and Tables 1 and 2 provide a comprehensive list of the specific measures and their timing.

C.  Fiscal Policy

7.  We will maintain the originally planned fiscal stance for 2000. Following a general government deficit of 1 percent of GDP last year, this year’s budget set a deficit target of 1½ percent of GDP. While the external current account deficit in the first half of 2000 is estimated to be somewhat higher than originally projected, we expect a significant improvement in the second half of the year and beyond, owing to the recovery of exports and good prospects for tourism. Moreover, we expect foreign direct investment inflows to cover the financing needs fully. Hence, on present projections our original deficit target of 1½ percent of GDP in 2000 remains appropriate. However, in implementing the budget during the remainder of the year we will maintain sufficient flexibility to permit a tightening of the fiscal stance should the current account position show signs of being substantially weaker than now projected.

8.  This year’s strong revenue performance permits us to raise spending beyond budgeted levels in some areas. The budget surplus in the first half of the year was the result of a marked revenue overperformance, while expenditures were kept within budgeted limits. The revenue outlook for the remainder of the year is good. In addition, we are determined to make strong efforts to reduce arrears to the budget, with a decline of 88 million leva in overdue obligations to the tax and social security administrations targeted for the second half of 2000. On this basis, we are prepared to increase budgetary allocations cautiously and selectively, with a view to promoting economic growth and job creation, alleviating the costs of adjustment to the poor and unemployed, and raising budgetary wages from unsustainably low levels. We will accelerate our public investment program, providing additional financing of some 200 million leva to growth-enhancing projects. We will ensure that the Unemployment Fund has sufficient resources to cover the increased benefit requirements. We will also aim to finance temporary employment programs designed to create a substantial number of jobs for next winter, especially in distressed areas. We are prepared to raise social assistance by 55 million leva (0.2 percent of GDP), targeting the increased aid to those most in need. We will also increase average budget sector wages by 10 percent from October 1, 2000, implying an average increase for the full year of 10 percent, somewhat more than originally planned. However, this will not raise the government wage bill above budgeted levels as we have reduced staffing faster than expected, with average budget sector employment in 2000 projected to be 8.5 percent below last year’s level.

9.  We will preserve significant margins in the budget until later in the year to facilitate a tightening if needed. We will continue to utilize the provision under the Annual Budget Law that allows the Ministry of Finance to limit discretionary spending to 90 percent of the budget allocation. We also expect that some of the 200 million leva contingency to cover unanticipated costs of pension and health reform will remain unused. In September, we will review the fiscal and balance of payments outcomes and prospects in consultation with Fund staff. Should the review indicate a need for a lower-than-budgeted fiscal deficit, we are committed to preserving the margins and taking additional fiscal action as necessary to achieve a revised deficit target. However, should the review indicate that a tightening is not needed, we would be prepared to use some of the margins to provide budgetary employees and pensioners additional one-time payments at the end of the year. We are also prepared to provide additional support to selected state enterprises (including the district heating companies and state railways) which, despite our strengthened restructuring efforts, need more resources to cover the impact of higher international energy prices.

10.  We remain committed to creating a unified revenue agency (URA) to enhance our capacity to collect taxes and social contributions. We have laid the groundwork by preparing a comprehensive Concept Paper which the Council of Ministers adopted on June 29. Our detailed preparatory work revealed that more time than originally envisaged will be needed to integrate revenue collection in an agency using state-of-the-art information technology (IT) while safeguarding revenue performance in the interim. The Concept Paper provides for a 12-month first stage of the implementation process, where specific improvements will be made in the functioning of the General Tax Directorate (GTD) and the National Social Security Institute (NSSI), as well as in their level of coordination and cooperation. We have already appointed the project management team for the implementation stage and resolved the issues of funding and information technology development. In the period ahead, we will make every effort to ensure that we remain on track to create a consolidated revenue collection function. The first stage through mid-2001 will be led by an inter-institutional URA Commission with its own program financing. This Commission will design and implement interim processes and policies, and act as an intermediary between the GTD and the NSSI on collection issues. Key outputs of this stage include streamlined tax and social insurance forms for 2001, joint audits by tax and social security administrations, including in the regions. By mid-2001, a detailed schedule for the remaining preparatory work will be prepared. Throughout the process, we intend to rely strongly on continuous technical support from the IMF and the World Bank. We expect that the benefits of increasingly efficient revenue collection will allow a growth-enhancing reduction in the currently high social insurance contribution rates from 2001.

11.  We are pleased with our initial experience in implementing the overhaul of the existing pay-as-you-go pension scheme. This overhaul has been widely accepted by the population, and holds the promise of restoring the financial viability of this pension pillar. We are also making progress toward establishing funded pillars. In particular, we expect the licensing of the existing voluntary pension funds to be completed by September 2000. To ensure the successful operation of the funded pillars, we will take measures to limit their administrative costs, and will gradually relax the current stringent investment rules while improving our supervisory and regulatory capacity.

12.  Turning to health care reform, at the beginning of July 2000 we launched the first stage involving outpatient care. In the coming months, the Health Insurance Fund will strictly monitor and control costs, including through releasing monthly payments to health care providers only if the terms of the bilateral contracts are satisfied. The second stage, involving hospital care, will be launched from mid-2001. In preparation, by September 2000 the Health Insurance Fund, together with the Ministry of Health, the Ministry of Finance and the NSSI, will work out a clear concept of how this stage will be financed without an undue burden on the general government budget.

13.  To further improve treasury operations, we will in the coming months focus on integrating project financing into the budgetary framework and on implementing the Single Treasury Account (STA). Starting with the ongoing preparation of next year’s budget, the Ministry of Finance will incorporate into the budget only those foreign-financed projects requiring government guarantees (with domestic co-financing funds as needed) which the Council of Ministers has selected as priority projects in the public investment program and which fall within the external debt ceilings. Moreover, foreign grants will be managed under the treasury system, without the creation of new extrabudgetary funds. To pave the way for the use of the STA for most central budget payments from October 1, 2000, the Bulgarian National Bank (BNB) has recently adopted a regulation on simplified documentation, and in July 2000 started the consolidation of all government leva accounts in the BNB into the STA. Finally, we are working with Fund and OECD experts to finalize a new unified chart of accounts for the general government that conforms with our national accounting standards and facilitates accrual accounting. We expect the new chart of accounts to be introduced in first-level spending units from the beginning of 2001.

14.  We place great emphasis on developing our medium-term fiscal framework as an anchor for annual budget exercises and for facilitating EU accession. Following successful stabilization, our main remaining fiscal challenges include identifying and converging toward the optimal size of government for Bulgaria, reducing the high tax and social security burden to enhance sustainable growth rates, meeting the spending needs of NATO and EU accession, and clarifying other expenditure priorities. In addition to implementing institutional reforms as described above, we aim to address these challenges by strengthening our existing medium-term fiscal framework. To this end, we will: conduct mid-year reviews to update our existing three-year rolling fiscal projections; improve the coordination between the annual budget, the public investment program, and debt management; develop multi-year revenue and expenditure plans incorporating the government’s priorities; enhance the capacity to quantify the fiscal implications of policy options; and begin conducting the annual budget discussions with first-level spending units and municipalities in a multi-year setting.

15.  We have determined the key parameters of the draft 2001 budget with a view to boosting growth through a substantial reduction in the tax burden while maintaining a prudent fiscal stance. Details of the draft budget will be discussed with IMF staff in September before it is submitted to parliament, and approval of an agreed 2001 budget will be a condition for completing the fifth program review. We will limit the general government deficit to 1½ percent of GDP, as in 2000, with a primary surplus of 3 percent of GDP. The tax cuts that we plan to implement will reduce revenue intake by about 1½ percent of GDP, and consist of the following: increasing the tax brackets for personal income taxes, which will lower the PIT burden by 2 percentage points; a 3 percentage point reduction in the social contribution rate; and a 5 percentage point reduction in the central profit tax rate, which will lower the corporate tax burden to a level comparable with that in other EU accession candidate countries. The revenue impact of these measures will be partly offset by the removal of the zero rating of VAT on tour packages sold abroad, effective from the beginning of 2001. Regarding tax administration, we will simplify the presumptive (patent) tax to make it easier for small businesses to employ additional workers, and reduce the VAT refund period for non-exporters from 6 to 4 months. A further impetus to the non-government sector arises from a reduction in nontax revenues of about ½ percent of GDP in 2001. This reduction stems in large part from a drop in dividends paid to the budget as several large state enterprises will have been privatized by end-2000, and from lower penalty interest payments as arrears to the budget decline. To offset the overall revenue loss of 2 percent of GDP, we will reduce the expenditure ratio in next year’s budget commensurately. We will achieve the bulk of the needed reduction by reversing the temporary increases in the 2000 budget related to the revenue overperformance, but we will also make additional cuts focussed on subsidies to achieve the deficit target. To this end, we will ensure that structural reform measures are ambitious and are implemented in full (see below). We will also maintain the budget sector wage bill constant relative to GDP (excluding possible one-time payments in late 2000) while decompressing the wage structure. To ensure a flexible implementation of next year’s budget, including room to allow for a tightening if warranted by external developments, we will continue to apply the rule of releasing only 90 percent of budgeted allocations to spending units until late in the year when adherence with the annual budget targets can be confidently assessed, and will maintain adequate contingencies to cover the transitional costs of structural reform.

D.  Structural Issues

Energy sector reform

16.  We will press ahead with the reform of the electricity sector. During the past two years we have made rapid progress in restructuring the National Electric Company (NEK), and intend to maintain the pace. Following intensive preparations and the adoption of key pieces of secondary legislation, we completed in June the legal separation of NEK into the generation, transmission, and distribution components. This separation is the first step on the road to the privatization of NEK’s generation and distribution assets, which we envisage to take place over the next few years. In the coming months, we intend to take several more steps. The documentation for licensing of the separated companies will be submitted to the State Energy Regulatory Commission (SERC) by end-2000 and licenses will be issued within 6 months of receiving the request. By September 2000, we will contract a diagnostic audit of the opening balance sheets and internal accounting controls of these companies, to be completed by end-2000. Also by September 2000, individual contracts covering the period through end-2000 will be signed between the Single Buyer (NEK, the transmission company which will remain state-owned) and the generation and distribution companies. The Power Purchase Agreements (PPAs) concluded by NEK will comply with Bulgaria’s energy balance (taking into account the potential for energy efficiency to reduce demand), the regulatory mechanism, and the stability of pricing and tariffs. During the transition period until January 1, 2002, we will ensure that the Single Buyer does not enter into any PPAs with a term longer than one year, except with the approval of a standing commission appointed by the Prime Minister. Finally, by end-2000 the Council of Ministers will adopt the remaining pieces of secondary legislation associated with the Energy and Energy Efficiency Act. Throughout the reform process, we will ensure the independence and strength of the State Energy Regulatory Commission so that the electricity sector is restructured in a transparent manner, consistent with the Energy Act.

17.  To preserve NEK’s financial viability during the restructuring over the coming year, we will make strong efforts to cut costs while raising household electricity prices cautiously. Our strategy to cut costs is based on technological improvements and better financial discipline in the separated companies. In May, business plans aimed at improving financial performance were approved for the separated generation and distribution companies. To achieve the targeted results, a number of measures are being taken to reduce technological losses and theft. We estimate that these measures, which include optimization of load distribution and replacement and sealing of commercial meters, will result in an improvement in the companies’ financial performance of 70 million leva in the second half of 2000 alone. We will achieve additional savings through better control of procurement and accounting, and through the purchase of electricity from the lowest-cost generators. To ensure compliance with the technological measures and promote financial discipline, the State Agency of Energy has started a monthly monitoring of the performance of the separated companies, and new boards of directors including financial and technical experts have been established. To keep labor costs in NEK’s successor companies under control, we will not increase staffing and have mandated average wages to be kept at or below the level in the first quarter of 1999. We are also taking steps to raise revenues. We recently reached an agreement on a major increase in electricity exports, which is expected to raise NEK’s profits by 30 million leva this year, and by a further 7 million in 2001. To improve revenue collection, the separated companies are also negotiating rescheduling plans with debtors whose combined arrears totaled some 119 million leva in July 2000. For its part, NEK is committed to clearing its arrears of 120 million leva to the funds for decommissioning nuclear reactors and for the safe storage of nuclear waste by end-2001 through an accelerated payment schedule. Helped by the cost-cutting and revenue-raising measures, we will be able to implement somewhat more moderate end-user price increases over the coming year than originally scheduled. Effective August 1, 2000, we will raise the price of electricity for households by 4 percent which represents the difference between the increase originally scheduled for January 1, 2000 and that actually implemented. To mitigate the social impact of the increase, we will provide additional funds in the budget for energy assistance targeted to the poorest households. After the next heating season, we will continue to move electricity prices toward full cost levels by January 2002, when the State Energy Regulatory Commission starts to regulate the prices.

18.  We will make every effort to strictly implement the bold action plan for the ailing district heating sector adopted by the Council of Ministers on June 29, 2000. The plan, which was prepared in coordination with the World Bank, aims at improving the efficiency of viable district heating companies (DHCs), while central government subsidies to 8 companies will be phased out within one year. Specifically, we have chosen 8 DHCs to undergo major restructuring and to undertake investments beginning from early 2001, which will enable consumers to manage their consumption, and the companies to cut costs. The investments will restore these DHCs’ full commercial viability (including debt service on loans received) by end-2004. These companies, which currently receive about 80 percent of the operating subsidies to the sector, have been identified as providing the least-cost heating services if modernized. We have also identified 3 DHCs from which we will withdraw all central government subsidies from the beginning of the next heating season. For the remaining 11 DHCs, we do not envisage significant investments but will close down uneconomical services in these companies over the coming year, and will withdraw all central budgetary subsidies from 5 of these companies by mid-2001. By September 30, 2000, the Council of Ministers will adopt a decision specifying these DHCs. When a district heating company is closed, the government will ensure that one year’s subsidy per apartment is paid to all its still connected customers to facilitate the transfer to alternative methods of heating. Other key restructuring actions include (i) addressing the free-rider problem related to disconnected consumers through a dual-tariff structure (a fixed capacity charge for all building occupants and a variable charge according to actual consumption) to be effective from the beginning of the heating season; (ii) enabling DHCs to disconnect buildings which are not cost-effective to supply with heat from the beginning of the coming heating season; and (iii) agreeing by September 2000 on financial burden sharing for 2001 and onward with the municipalities in cities with DHCs, and determining by end-2000 the scope for transfering the ownership of DHCs to these municipalities. As for average end-user prices, for the next heating season we will maintain them unchanged owing to the high elasticity of demand observed in the context of previous large price increases. From mid-2001, the end-user prices will be based on the recommendations of the independent energy regulatory commission. With the envisaged restructuring and energy-saving investment, we believe that we can phase out central operating subsidies to the district heating sector by end-2004. We will, however, increase this year’s budgetary funds from the originally allocated 38 million leva to 91 million leva, including through transfers to the municipalities and budget organizations financed by the republican budget, and through social assistance. The additional funds should enable the DHCs to clear the large arrears they have accumulated to suppliers, especially Bulgargaz. For 2001, the central operating subsidies will be reduced substantially. Finally, to avoid providing a quasi-fiscal subsidy and the elimination of interfuel competition, we will refrain from merging district heating companies with other state-owned enterprises. We will also ensure timely payment of district heating bills by budget-dependent organizations.

19.  We are determined to keep the so far very successful restructuring and financial rehabilitation plan for Bulgargaz on track. To date, about 40 percent of the company’s overdue obligations have been repaid as scheduled, and Bulgargaz remains current on all its obligations. Following a 99 percent collection rate in the second half of last year, Bulgargaz’s collection rate has declined to 93 percent so far in 2000, as some of its customers, including district heating companies, have faced major financial difficulties. With the implementation of the district heating restructuring plan as described above, the collection rate is expected to recover to 95 percent in the second half of this year. Looking forward, Bulgargaz is implementing a three-year investment program, primarily to raise transit capacity by 70 percent, which should result in a substantial rise in transit revenues. Labor costs have been kept under control, with the wage bill now no higher than two years ago. Progress has also been made toward the establishment of private regional distribution companies by preparing information memoranda for potential investors on 10 major branches of the company’s distribution segment. The gas monopoly is also considering different forms of foreign investment to develop the consumer network.

20.  We will continue the restructuring of the coal sector in line with the updated action plan for 2000–01 we adopted in June 2000. In addition to the nine unviable pits (sections of coal mines) that we closed earlier, we have now identified 5 more where production will cease, and 3 where unviable activities will be liquidated. The legal act for liquidation will be issued by July 2000, and technical liquidation begun by November 2000. The remaining mines are being prepared for privatization. We will issue accelerated privatization tenders for 7 coal mines listed in the action plan, and will close down most of the remaining unviable pits by end-2000 and all the unviable ones by end-2001. To alleviate the impact of the restructuring of the coalmines, which are located in distressed areas, we are prepared to allow the release of budgetary contingency funds, but only in the context of the final resolution (privatization or liquidation) for these companies. Also in the coal sector, we will liberalize briquette prices by October 2000, well ahead of schedule.

Enterprise restructuring and privatization

21.  We continue to move ahead rapidly with divestiture of state-owned property. Through June, we had privatized 82.3 percent of state-owned assets excluding infrastructure and 51.7 percent of the total assets. In addition to the sales of majority stakes of enterprises, we have put greater emphasis this year on the sale of residual shares. In the first half of 2000, we sold or otherwise disposed of residual shares for most nonstrategic enterprises privatized by end-1999. Out of 1150 enterprises, we sold 557 minority share packages, transferred 154 to the Center for Mass Privatization, and offered 41 for sale on the Sofia Stock Exchange. In a further 379 cases, the minority package was sold to the majority owner, and in the remaining cases, the shares were set aside to cover restitution claims. We will sell or otherwise dispose of the residual shares for all the remaining nonstrategic enterprises by end-2000. Regarding the large enterprises, we have been forced to reconsider our strategy and marketing efforts. Following over one year of negotiations, we could not come to terms with the single bidder for the telecommunications company, BTC, and decided to terminate the original privatization procedure on July 31st. The working group in charge of the sale has already started to prepare a review and evaluation of the lessons learned from this process, and we intend to quickly initiate another tender which will be undertaken in a transparent way utilizing the advice of an investment advisor whom we intend to appoint in September. The original privatization procedure for Bulgartabak was also halted as we had expected at most only one offer by the deadline date of July 24. Following a review by Government, we will adjust the privatization strategy for the company to permit a wider circle of bidders. Once the new strategy is agreed, we anticipate beginning the marketing quickly, with the expectation that the sale would be finalized in the middle of 2001. On other large enterprises, while several docks at the Varna Shipyard are currently being rented to the private sector, we hope to negotiate the sale of the yard as a going concern. We will also continue our efforts to privatize Balkancar. While the supervisory board of the privatization agency rejected the sale contract for this company, we will not hesitate to open a new procedure for its privatization. The general climate surrounding privatization has improved with the proper discounting of bids by management-employee teams, and the expansion of the list of enterprises that can only be sold for cash. Looking forward, in the energy sector in particular, we will focus our efforts on attracting serious strategic investors. We will also increase the transparency of the privatization process by publishing the main parameters of all bids of interested buyers once a sale is completed.

22.  We are making substantial progress in speeding up liquidation and bankruptcy proceedings. Despite difficult market conditions, we have continued to dispose of the assets of Group B enterprises (commercial enterprises under the isolation program) that had been entered into liquidation last year. We are confident that we will be able to finish this process by end-2000, although the situation with the assets of Vidachim is particularly complicated. For other enterprises, we have taken steps to accelerate liquidation and bankruptcy proceedings and to facilitate the development of strong rehabilitation programs that merit court approval. Following the completion of public debate and a review by the European Integration committee of parliament, we expect an amendment to the Commercial Code that simplifies and accelerates bankruptcy procedures to pass second reading in parliament by September 2000. Meanwhile the Institute for Magisterial Training recently marked the first anniversary of its establishment, and judges continue to receive training on bankruptcy matters. In accord with our earlier commitment, as of July 1 an inter-ministerial committee put in place and started to enforce the newly established requirements for the selection, removal, and supervision of liquidators for state-owned enterprises. Prior to this, improvements were made in administering those enterprises under the direct purview of the Ministry of Economy which is the largest principal of state-owned enterprises. In March a specialized commission headed by a deputy minister of Justice was created to select the applicants for trustees in bankruptcy and to supervise their activities. This commission has already been active in responding to various issues raised by creditors and state bodies with respect to the behavior of receivers.

23.  Despite good efforts to implement its financial recovery program, the national railway company, BDZ, remains in a dire financial situation, largely owing to a failure of freight traffic to recover from the low levels experienced last year. BDZ has also been adversely affected by higher fuel prices, and the strong U.S. dollar has impacted debt service payments. To reduce the subsidy needs, we will take a number of additional measures while continuing with strict implementation of the rehabilitation plan approved by the Council of Ministers last November. First, a restructuring of passenger fares will raise revenues by 2 million leva in the second half of 2000. Second, on August 1, a unit will be established in BDZ to sell the company’s non-operational assets estimated at 135 million leva. In the second half of this year, sales of 20 million are targeted. Third, during the same period, savings of 9 million leva in spending operations and maintenance as well as lower costs will be implemented. Looking forward, we intend to clearly define the public service obligations that should in the long run be borne by the state, a crucial issue given the impending breakup of the company into freight, passenger and infrastructure components, as foreseen in the new Railway Law.

Labor market policies

24.  We will continue to implement a strict incomes policy for state enterprises, with a view to imposing hard budget constraints and enhancing productivity. In the second quarter of this year, implementation of the 2000 Incomes Policy Ordinance was successful. In particular, in the group of 102 companies that we monitor most closely and which are subject to wage bill freezes (companies with the largest losses and arrears, state monopolies, and enterprises receiving subsidies) the total wage bill was kept to 9 percent below the level in the third quarter of 1999. While 7 firms violated the freeze, their combined wage bill was just 3.3 percent of the total. In the second half of 2000, we will continue the wage bill freeze for the monitored companies, and will take measures, including fining and firing of management, in enterprises with excessive wage increases. Agreement on the 2001 incomes policy will be a condition for completing the fifth program review.

25.  We are taking steps to enhance labor market flexibility and promote employment. On June 22, the Council of Ministers approved draft amendments to the Labor Code which had last been updated five years ago, and we expect parliament to adopt the amendments by September 2000. The amendments make it easier for firms to adjust their workforce to changes in the economic environment. For example, contracts can now be terminated for economic reasons, and working hours can be extended in exchange for extra leave time and pay. Several provisions ensure the consistency of the Labor Code with EU standards, notably regarding non-discrimination and the protection of women’s jobs during pregnancy. In parallel, we will work with the World Bank to strengthen active labor market policies, making them better targeted toward regions with high unemployment.

Financial sector

26.  We are making rapid strides toward a fully privatized banking system. We took an important step in this direction on July 7, 2000 when we signed the sales contract for Bulbank, the largest bank in Bulgaria, to a strong strategic investor. In the case of Biochim, the winning bidder was rejected by the Bank Consolidation Company on July 26 owing to the nature of its shareholder structure. Nevertheless, we have already initiated preparations for a new privatization procedure, and will by end-September issue a new tender with an offer deadline no later than end-2000. Based on the expected timeframe for reviewing the offers and negotiating the final sales contract, the contract can likely be signed in the first quarter of 2001. Once this sale is completed we will have privatized six banks accounting for well over one half of the total assets of Bulgaria’s banking system since July 1997. This was accomplished despite very negative market factors existing throughout much of this period as a result of the Asian and Russian financial crises and the conflict in Kosovo. Regarding the last remaining large state-owned bank, DSK (formerly the State Savings Bank), we are taking steps to transform it into a fully commercial bank. To level the playing field, we eliminated as scheduled the full government guarantee of DSK’s deposit liabilities, and they are now covered in the same way as all other commercial banks under the Deposit Insurance Law. The transition to partial deposit insurance was successful, with no discernable loss in DSK’s deposit base. We are improving the bank’s branch network and upgrading its information system with EU assistance, and will shortly introduce foreign exchange services on a pilot basis. We are committed to continuing the restructuring of DSK, with a view to starting its privatization process in 2001. As for the Central Cooperative Bank, where the state’s share had been just below 50 percent, we reduced this share to 33.9 percent in June 2000, and intend to reduce it further by September 2000.

27.  We are also taking other measures to promote a well-functioning financial system. On July 3, 2000, we lowered the minimum reserve requirement from 11 to 8 percent. We will continue to manage government securities with a view to deepening the market. We will regularly issue short-term securities to ensure sufficient collateral in the interbank market. At the same time, we will pace the issuance of securities in a way to avoid liquidity shocks stemming from large movements in government accounts, coordinating our efforts with the BNB. We will also issue longer-term securities to lengthen the maturity structure of lev- denominated domestic debt, while refraining from issuing bearer bonds. We are also taking further steps to modernize the payments system. We have made important advances in lowering costs by reducing requirements on paper trail, and are taking steps to legalize the use of electronic signature in resolving disputes by end-2000. We are also working toward launching in 2001 the next-generation payments system that will allow for real time gross settlement. We are drafting a modern and comprehensive bank bankruptcy law which we will submit to parliament by September 2000. The draft law allows a wide range of options for bank resolution, including liquidation and purchase-and-assumption transactions. These solutions are consistent with the newly adopted EU directives. We have designated the Deposit Insurance Fund (DIF) as the administrative body to handle the bank resolution process. Both the new responsibilities imposed by the bank bankruptcy law and the existing ones on deposit insurance require the DIF to be strengthened. To this end, we are training its staff, and are amending the law on deposit insurance to allow more effective collection of premiums and investment.

28.  Building upon the good progress to date, we will continue to strengthen banking supervision while promoting the provision of bank credit to the private sector. In July 2000, we adopted a regulation on consolidated supervision, and harmonized related regulations with it. To implement consolidated supervision, we are seeking assistance from European central banks. To promote the private sector credit, we have established a fully operational central credit registry. The registry receives information on domestic credits above 10,000 leva from all banks in Bulgaria, and is accessible to all banks without charge. We are expanding the coverage of the credit registry to include information on credits from abroad. Moreover, the aforementioned improvements in bankruptcy and liquidation procedures and the training programs for judges should speed up the resolution of conflicts, enabling banks to seize collateral more quickly in case of default and thereby reducing an important obstacle to bank lending.

Other structural issues

29.  We are determined to improve the business climate and attract foreign direct investment. In the first half of 2000 we initiated a major reduction in red tape by removing 100 licensing requirements, and by mid-2001 we expect 40 more requirements to be eliminated. We are also taking steps to speed up and simplify administrative procedures: effective July 2000, if agencies do not rule on business permit applications within stipulated time limits, the application is deemed to have been accepted. Moreover, we will improve the transparency of administrative regulations for business investment by publishing booklets on tax regimes and administrative procedures pertaining to the opening and operation of business. By end-2000, we will undertake a review of the progress made in streamlining business licenses and set targets for reducing licensing requirements in 2001.

30.  We are taking a number of measures to improve public administration. Following the passage of the State Administration Act last year, we have established a common organization structure for all ministries, as well as a code of organization for all ministries and 86 government structures. The code of organization for the 28 regional administrations was adopted in June. Pursuant to the new Civil Service Law, in March we approved implementing regulations defining the basic parameters of the future merit-based pay system. We are currently working on developing a performance assessment program with the assistance of the World Bank, and once this is completed a radically new pay system can be put in place. We also aim to implement a code of conduct for civil servants. In the context of the administrative implications of European integration and possible admission to NATO, we will carry out further organizational and functional reviews, evaluating the possibilities for privatization of certain administrative services, and aiming for the introduction of market mechanisms in the financing, operation, and management of executive agencies. To further improve the quality of public services, we are in the process of establishing an Institute for Public Administration and European Integration designed to promote the professional development and training of civil servants.

31.  In agriculture, we will continue to develop a well-functioning land market and promote a private-sector based rural credit market. By April 2000, land restitution had reached 98 percent. To implement the Law on Unified Cadastre and Property Register approved by parliament in March, an Agency for the Cadastre will be established by end-2000 to facilitate the change in the registration of land from an owner-based to a parcel-based system. This change will facilitate the tracking and registration of land titles, and is expected to promote domestic and foreign investment in agriculture in Bulgaria. To create a self-supporting private market for finance in the agricultural sector, we last year established a system of warehouse receipts and guarantees which has so far served to back only a small amount of loans from commercial banks. If the system does not take off in its second season this fall, we will look for means of reinforcing the system without involving public guarantees.

32.  We will continue to give high priority to external debt management. We have continued discussions with bilateral creditors, and recently settled bilateral obligations with Romania. A comprehensive debt management strategy laying out the broad framework and medium-term objectives for debt management was approved by the Council of Ministers in March 2000. We have already taken key steps to implement this strategy, and are now in the process of drafting a Sovereign Debt Law which we plan to submit to the Council of Ministers by September 2000. As part of this strategy, we will continue to pursue debt service swaps for infrastructure or environment with Paris Club creditors, and other debt management operations will be undertaken only if overall liquidity is sufficient and there are adequate reserves in the fiscal reserve account.

33.  We are making further progress in liberalizing our trade regime. All non-tariff barriers have been eliminated following the removal of the last remaining export ban on raw tobacco in April 2000. A bilateral agreement on the liberalization of trade in agricultural goods with the European Union-Bulgaria’s largest trading partner-will come into effect from July 1, 2000. This agreement envisages a reduction of duties on certain agricultural imports to zero starting July 1, as well as the removal of EU export subsidies on some agricultural goods (Bulgaria has none). Regarding the 33 state trading companies with foreign trade operations, we remain on track to complete their privatization or liquidation by end-2000. As of January 2000, there were only five companies outstanding for which privatization (or liquidation) processes have not been started. Of these, tenders for the privatization of three companies have already been issued, and legal problems in the remaining are expected to be resolved in the coming months. We remain committed to another round of scheduled reductions in our average most-favored-nation tariff rates on industrial and agricultural goods effective January 1, 2001. Beyond our existing commitments, we are now prepared to reduce the number of tariff bands from 25 to 22 at that date.

E.  Program Monitoring

34.  During the third year of the extended arrangement, the program will be monitored on the basis of the implementation of structural performance criteria and benchmarks (Table 1), and quarterly and continuous quantitative performance criteria and indicative targets (Annexes I-VII), set on a cumulative basis from December 31, 1999. The government will conduct with the IMF the fifth review under the arrangement no later than March 2001. Other performance criteria-applicable on a continuous basis-remain as defined in the Memorandum of March 9, 2000 (Annex VIII).

Annex I


Performance Criteria on the Overall Deficit and Indicative Target on
Revenues of the General Government

  Overall deficit ceilings1 Revenues (Indicative)

  (In millions of leva)
January 1, 2000–September 30, 2000 14 7,446
January 1, 2000–December 31, 2000 85 10,361
January 1, 2000–March 31, 2001 (indicative) 255 12,801
January 1, 2000–June 30, 2001 (indicative) 0 15,350

1The figures denote the largest allowable level of the deficit; a negative figure denotes a surplus.

The general government accounts are defined to include 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, net nonbank credit to the general government, privatization receipts of the budget, and receipts from external loans for direct budgetary support minus amortization paid.

The overall deficit ceilings have been defined excluding contingency expenditure related to the cost of structural reform (defined as contingency spending not related to natural disasters), and will be adjusted upward for the cumulative actual contingency expenditure related to the cost of structural reform. This cumulative adjustment will not exceed BGN 47 million at end-September, and BGN 269 million at end-December 2000, BGN 304 million at end-March, and BGN 344 million at end-June 2001.

Annex II


Performance Criteria on the Floors on the Balance of the Fiscal Reserve Account
(In millions of leva)

  FRA Assumed cumulative flow of official
external financing to the budget
(excluding the IMF)

Level on December 31, 1999 2,601  
Cumulative change from level on December 31, 1999
September 30, 2000
–442 212
December 31, 2000 –404 212
March 31, 2001 (indicative) –690 251
June 30, 2001 (indicative) –249 582

The Fiscal Reserve Account (FRA) consists of the balances in leva and in foreign exchange of the following accounts: all budgetary accounts in the banking system, including the central budget, ministries and agencies, central government extrabudgetary funds as defined in Annex No. 6 of the 2000 Budget Law, the National Social Security Institute, and the Health Insurance Fund.

For the purpose of the program, the balance of the FRA is defined net of net on lending of purchases from the IMF by the BNB from January 1, 2000. It is also defined before the use of the contingency (as defined in Annex I) and will be adjusted by the same amount in the opposite direction of the adjustment on the ceiling of the overall deficit for actual use of the contingency.

The floor on the balance of the FRA will also be adjusted downwards by the amount of the shortfall of official external financing to the budget (other than from the IMF) relative to program projections. This cumulative adjustment will be capped at US$25 million in September 2000, and US$50 million in December 2000, and US$75 million in March 2001 and US$100 million in September 2001, calculated at the program exchange rate. Any excess official financing relative to program assumptions will raise the FRA floor by the amount of this excess.

The limits will be monitored from the accounts of the banking system, to be provided twice monthly by the BNB and the Ministry of Finance. For the purposes of the program, deposit accounts that are denominated in foreign currencies will be converted into leva at the December 31, 1999 exchange rates.


Annex III


Performance Criterion on the Floor on Deposits of the Banking Department

The available balances of the Banking department will be deposited in the Issue Department, including a deposit in SDRs according to the reserve position and holdings of SDRs at the IMF. The Banking Department may hold part of its deposits in foreign currencies.

From July 1, 2000 until June 30, 2001, the deposit of the Banking Department with the Issue Department shall, on average in any given week, exceed BGN 680 million. The floor on the Banking Department deposits is indicative from January 1, 2001 to June 30, 2001.

The floor set above will be adjusted for:

    (i) cumulative repurchases to the IMF less maturity payments made by the government to the BNB from January 1, 2000.

    (ii) any revaluation loss on the monetary gold which might be debited from the deposit of the Banking Department, if the gold price falls below DM 500 per troy ounce.

During the monitoring period, any increase in outstanding lending by the Banking Department to banks greater than the equivalent of BGN 2 million will require consultation with the IMF staff.


Annex IV


Performance Criteria on the Ceilings on Tax and Social Insurance Arrears

    (In millions of leva)
  Total GTD

Outstanding as of:
   December 31, 1999 (actual)
561 395 166
Cumulative change from level on December 31, 1999:
   September 30, 2000
–111 –100 –11
   December 31, 2000 –176 –130 –46
   March 31, 2001 (indicative) –210 –160 –50
   June 30, 2001 (indicative) –244 –190 –54


The performance criterion is on the sum of change in monitored arrears to the GTD and arrears to the NSSI. For the purpose of this performance criterion, arrears are defined to include interest and penalties.

The enterprises monitored for arrears to the GTD:

1. Lukoil - Neftochim
2. BDZ
3. Plama AD
4. VMZ AD - Sopot
5. Haskovo BT AD
7. Solntse BT AD
8. Arkus AD
9. Sugar Factory AD
10. Pernik Mines
11. Arsenal EAD
12. Vini EAD
13. Bourgas Seaport
15. Bourgas Sugar
Facory AD
17. Maritsa - Iztok Mines
18. Great Bulgarian Mills EAD
19. Kambana 1899 AD
20. Bulgargaz EAD
21. Trema AD
22. Madara AD
23. Dunarit AD
24. Maritsa KK AD
25. Ledenika AD
26. Dobrich Mel AD
27. Plovdiv BT AD
28. Minstroi Rodopi AD
29. Pleven BT AD
30. Quartz EAD
31. Bobov Dol Mines38. Paraxodstvo BMF45.Aich Dzi Ki Internacional
32. Nefteks Petroleum39. Stara reka46. Kitka
33. Toplofikatsia Pernik40. Shumensko pivo 47. Svetlina
34. Stomaneni trabi41. Agroteknika48. Burgasbas
35. Orfei42. Vineks Preslav49. Rodopa
36. Chernomorsko Zlato43. Cherno more50. LVK Gamza
37. Korabno mashinostroene44. Liteks Dzus
The enterprises mentioned for arrears to the NSSI:
1. Bobov Dol Mines AD15. Kitka AD29. Elprom EMT AD
2. Stomana AD16. Stara Reka AD30. Balkanbas Mines
3. Pernik Mines17. Tezhko Mashinostroene AD31. Crystal EAD
4. Marbas Mines18. Berg-Montana Fitingi OOD32. Microprocessor Systems
5. Port of Burgas19. Promet EOOD33 Ustrem EOOD
6. Varna Shipyard20. KK Maritsa
Cherno More EOOD
34. Etavia AD
7. Entire Gorubso
Madan EAD
21. Cherno More EOOD35. Montana AD
8. Vidachim AD22. Dynamo AD,36. Mraz AD
9. Quartz AD23. Veslets -91 EAD37. Trema
10. Pirin Mine24. Podem AD38. VMZ AD
11. Plama AD25 ZMM39. Stomaneni Trabi
12. Burgas Copper Mines26. Pima AD40. Andela EAD
13. Higher Medical Institute27. Rubin AD41. NITI EAD
14. Polymeri OOD28. Belopal42. Obshtinski Avtotransport
43. Sanya58. Metalni Konstruktsii75. Rodopa 95 AD
44. Agropromstroy EAD59. Orfey OOD,76. Microak OOD
45. Kombinat za Obrabotka na60. Radomir Le Co Co EOOD77. Elastic EAD
      Tsvetni Metali AD61. Darvodobiv i Stroitelstvo78. ZMD Nikopol AD
46. Chavdar AD62. Dobrichka Mesna Kompania79. Aves-94 AD
47. Filtex AD63. Prikom EAD80. Sukmo EOOD
48. Vitamina AD64. Ilyo Voyvoda AD81. Gorubso EAD
49. Strumatex65. Dunarit AD82. Struma OOD
50. Dobritch Mel AD66. Burya AD83. Balkan Bank - Headquarters
51. Nistra EAD67. Mediket EAD84. Arsenal EAD
52. Elprom ZET68. Harmonia85. Balkanbas Mines, Paisiy Mine
53. V i K69. Pektin EOOD86. ZMM Technotronica
54. KZU Promishleno70. Uvion OOD87. Incoms EIM
      Stroitelstvo71. S-M 3388. Chepino EAD
55. Minstroy AD72. Technologia na Metalite89. Cherno More Mine
56. Elena Georgieva AD73. Sparky AD90. Panagyurski Mini
57. Ilindentsi Mramor74. Polyma AD91. Elko OOD
92. Dervent OOD
93. Kachestvena Metalurgia AD
94. Dobrich Mel
95. Kartal EAD
96. Kamet AD
97. Djebel Basma Service-4U
98. Josi EOOD
99. Tezhko Mashinostroene AD
100. Sipak-Bis OOD

This list is to be updated at the time of the fifth review.

For the purpose of assessing compliance with this performance criterion:

  • 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, 1999;

  • 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, 1999 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.


Annex V

Indicative Ceilings on the Monitored Total Outstanding Liabilities to Customs

  (In millions of leva)
Outstanding as of:
   December 31, 1999 (actual)
Cumulative change from level on December 31, 1999:
   September 30, 2000
   December 31, 2000 –2
   March 31, 2001 –3
   June 30, 2001 –3


This indicative ceiling relates to the total of the outstanding liabilities (including principal, interest and penalty charges) of the 20 largest debtors to the Customs Department. The list of enterprises covered is provided below.

Outstanding liabilities to the Customs Department exclude VAT and excise obligations collected at customs.

Agreements on writing off or rescheduling outstanding liabilities to the Customs Department entered into after December 31, 1999 will not reduce amounts counted as outstanding liabilities.

Enterprises in the list below which are entered into liquidation or bankruptcy proceedings will continue to be included in 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.

1. Haskovo BT11. Sanvel Lazio EOOD
2. Amal-2000 OOD12. Buren Foundation
3. Tri Alkols EOOD13. Van Kempen Rousse
4. Galax EOOD14. Inter Karlen 1 EOOD
5. VMZ Sopot15. Yanex - Yanulcho Petrov
6. Bourgas Port EAD16. Elliss M.
7. Samotlor OOD17. Offset Express AD
8. Neftochim AD18. Y. N. Linda and DZU
9. Bapersugar AD19. Glenfield Sofia
10. Grainer-Dippa OOD20. Science and Education


Annex VI

Performance Criteria on the Ceilings on Contracting and
Guaranteeing Public External Debt1
(In millions of U.S. dollars)

  One year and Under2 Over 1 year3 1–5 years3

Cumulative change from level on December 31, 1999:
   September 30, 2000
120 950 250
   December 31, 2000 160 1,100 250
   March 31, 2001 (indicative) 200 1,300 250
   June 30, 2001 (indicative) 240 1,500 250

1Debt 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. 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.
2The ceilings apply to the outstanding stock of short-term debt with original maturities of up to and including one year contracted or guaranteed by the general government or the Bulgarian National Bank. The general government is defined in Annex I. Short-term debt is defined for the purpose of this performance criterion to include all short-term debt obligations other than (i) normal import-related financing credits; and (ii) outstanding balances under bilateral payments arrangements. The actual stock of short-term debt outstanding (according to this definition) as of December 31, 1999 was zero.
3The ceilings apply to the contracting or guaranteeing of external non-concessional debt with original maturities of more than one year by the general government or the Bulgarian National Bank. A subceiling on such debt of more than one year and up to and including 5 years is also defined. The general government is defined in Annex I. Concessional loans are defined as those with a grant element of at least 35 percent of the value of the loan, using currency-specific discount rates based on the commercial interest reference rates reported by the OECD (CIRRS) in effect at the time of contracting or guaranteeing the loan. Excluded from the ceilings are: (i) changes in indebtedness resulting from refinancing credits and rescheduling operations, including the capitalization of interest; (ii) liabilities to the IMF; and (iii) changes in indebtedness resulting from debt exchange operations.


Annex VII

Indicative Ceilings on the Cumulative Change in Net Credit
from the Banking System to the General Government

  (In millions of leva)
Cumulative change from level on December 31, 1999:
   September 30, 2000
   December 31, 2000 471
   March 31, 2001 817
   June 30, 2001 285

Net credit from the banking system to the general government for the purposes of the program is defined as the sum of banks’ claims on all parts of the general government as defined in Annex I above, less the sum of general government deposits with the banking system (excluding the balance of suspense accounts), as reported in the accounts of the banking system. Claims cover bank loans and advances to the general government, as well as bank holdings of general government debt. General government deposits cover: (i) deposits of the consolidated budget (including those of local governments and the net balance of the Privatization Agency); and (ii) the net balances of all other extrabudgetary funds and accounts, except the suspense accounts.

For the purposes of the program, those components of net credit to the general government that are denominated in foreign currencies will be converted into leva at the exchange rates and cross exchange rates prevailing on December 30, 1999 (accounting exchange rates).

For assessing observance of the above limits on the cumulative change of net bank credit to the general government, the reported level of net bank credit to the general government as defined above will be adjusted to exclude: (i) the impact of debt operations (including any government instrument issued to guarantee deposits of a bank which is closed, or to recapitalize banks); and (ii) the impact of transactions involving closed banks. The indicative ceilings will be raised by an amount equal to the shortfalls in official financing relative to the program assumptions up to a limit defined in Annex II; and lowered by an amount equal to the excess. Both amounts will be converted to leva at the accounting exchange rate defined above.

The limits will be monitored from the accounts of the banking system, including the FRA, supplemented by information provided monthly by the Ministry of Finance on government debt, nonbank financing, gross and net receipts from cash and mass privatization. The limits will be adjusted appropriately if a revision of the monetary survey affects net banking system credit to general government.


Annex VIII

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.

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. Required reserves of the banking system will not be reduced to below 8 percent of eligible liabilities. The conditions for banks’ access to required reserves will not be changed.

4. 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’s Articles, nor impose or intensify any import restrictions for balance of payments purposes, nor accumulate any payments arrears except for amounts subject to rescheduling.

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