Bulgaria ROSC

Reports on Observance of Standards and Codes

Bulgaria and the IMF

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Prepared by the European I Department on the basis of information provided by the Bulgarian authorities1

March 8, 2001

I. Introduction

This note provides a factual report on developments since the March 2000 Report on the Observance of Standards and
. The information in the note is based on a self-assessment by the authorities of how practices have changed and how earlier recommendations have been implemented. For a full description of institutions and practices, the note should be read in conjunction with the March 2000 report.2

II. Data Dissemination

2. The authorities have taken several steps to improve data dissemination. Bulgaria began participation in the GDDS in May 2000, and Bulgarian metadata featured among the first presentations on the GDDS website launched at that time. The National Statistical Institute set up a website in 1999 which has expanded the availability and transparency of data. Once approved by the Council of Ministers, the release schedule for National Statistical Institute data is posted on the website. The Bulgarian National Bank (BNB) also began in 2000 posting detailed advance release schedules, including for the monthly publication of the balance sheets of the Issue and Banking Departments, along with information on how the data may be obtained. In December 1999, parliament removed bilateral debt data from the "List of State Secrets", thereby removing a key obstacle to its publication. These data are now published as part of the total external debt data. The Ministry of Finance (MOF) also opened a website in November 1999 on which it posts summary updates of central and general government operations on a biweekly basis, as well as matters relevant to tax payers. The MOF website also posts GFS data from 1991 on. Compilation of Bulgaria's international investment position began in 1999, and data for that year have been published in the 2000 IMF Balance of Payments Statistics Yearbook. Revisions to the data on external trade have become less significant as a result of the computerization of customs operations and the move from the cross-the-border basis to the customs-registration basis in recording trade flows.

III. Fiscal Transparency

3. The implementation of the treasury project has led to a number of improvements in fiscal transparency. A new chart of accounts for the general government has been developed, and is being applied in the execution of the 2001 budget. Lower level spending units will introduce this chart during a transitional period. The new charts are broadly consistent with EU standards ESA95 and the new Government Finance Statistics (GFS) Manual. Utilizing a new financial information management system, the authorities expect to be able to apply the new accruals-based GFS standard beginning in 2002, at which time the budget classification system will also be updated.

4. Several improvements were effected in the 2001 budget document. The budget report provided a clear view of the macroeconomic environment and the implementation of the previous year's fiscal objectives. It also included an expanded discussion of fiscal risks, estimates of tax expenditures, and an analysis of the quantitative effects of each of the proposed changes in the tax system. The report was published on the MOF website.

5. In April 2000, the Council of Ministers approved a debt management strategy. This strategy sets out the main directions in which the Ministry of Finance will establish and implement a medium-term strategy. The strategy also sets the stage for improved coordination between the MOF and the BNB on debt and cash management issues. A Sovereign Debt Law, the legal framework for the new debt management strategy, is currently in parliament.

6. Significant progress has been made in ensuring uniform interpretation of tax laws. With the introduction of the new tax procedure code in 2000, the practice whereby regional tax offices gave independent interpretations of tax legislation stopped. In July 2000, the tax administration completed the installation of a "questions and answers" software system in each regional tax office. Now, when a taxpayer makes an inquiry, the regional tax office first determines whether the issue has been addressed by a headquarters ruling. If so, a printed copy of the interpretation is made. If not, the question is forwarded to headquarters for a reply. The reply is then provided to the taxpayer and the interpretation added to the central database. This process takes about 30 days. Under present practice, all such questions and answers are posted on the MOF website.

7. Bulgaria has strengthened its administrative bodies in charge of financial control. The role and responsibilities of the Agency for State Internal Financial Control have been clearly defined in the State Internal Financial Control Act, effective from January 1, 2001. In January 2001, Bulgaria became the first EU accession candidate country accredited to manage SAPARD money under the same guidelines that EU member countries use to manage state aid. Also in January 2001, the government decided to request opening the Financial Control chapter of the acquis communitaire.

IV. Transparency of Monetary and Financial Policies

8. Pursuant to the State Budget Law for 2000 (and again in 2001), the Ministry of Finance began to pay fees to the BNB for the provision of information on all budgetary payment transactions. The MOF now pays the BNB for maintaining the government debt registry, making debt service payments, and collecting regularly information from budget servicing banks (including the BNB) on the execution of the state budget.

9. In May 2000, the BNB published on its website the criteria for selecting banks eligible to service the state budget, the list of eligible banks, and the mechanism by which they must collateralize the state funds placed on account. In light of the development of the Single Treasury Account project, the criteria for selecting correspondent banks changed with the State Budget Law for 2001. Currently, all commercial banks are eligible to act as depositories and provide payment services for the government. In acting as a payment agent, the respective commercial bank must sign a service contract with the MOF. If it serves as a depository, it must block state securities as collateral against the respective government deposits as described in the website and in the December 2000 BNB Secondary Market for State Securities Bulletin.

10. A new Foreign Exchange Law was approved by parliament in September 1999 with effect from the start of 2000. The Law replaced the Law on Transactions in Foreign Exchange Valuables and Currency Control which dated from 1966, but had been subsequently amended. The new law brought the legal framework up to date with the existing de facto liberal regime, and liberalized and clarified the procedure for capital account transactions. The law establishes that all transactions, unless otherwise stated, may be undertaken freely. Under the law, responsibility for monitoring transactions in foreign payment instruments in exchange bureaus has been shifted to the MOF.

11. In 1999, the BNB Managing Board adopted rules on the BNB budget. The rules stipulate the principles and procedures for developing the central bank's annual budget and for monitoring its execution. A permanent commission has been established which is responsible for developing the budget and exercising monitoring and current control (on a monthly basis) in accord with these rules.

V. Banking Supervision

12. The authorities have taken several steps to address the issues identified in the original ROSC report.

13. In December 1999, the BNB launched a new quarterly publication "Commercial Banks in Bulgaria" with the objective of introducing high standards of transparency in the banking system. The bulletin provides information on the state of the banking system as a whole as well as individual bank statements, information on management, and a list of shareholders with at least 10 percent ownership. Changes in bank supervision regulations and other decisions pertaining to banking supervision are also provided.

14. The Central Credit Registry became operational and was made accessible to all banks in March 2000, after the introduction of a new software system. All banks began to report credits in excess of BGN 10,000 by June 2000, and the system was extended to credits from abroad in September 2000.

15. The authorities have taken measures to improve onsite and offsite examinations. Procedures for onsite and offsite examinations have been documented in manuals, and the underlying principles have been discussed with affected parties. In particular, an outreach program for the banking industry was organized in September 1999 to explain the CAMELS rating system, and all supervised banks have now received CAMELS ratings based on actual onsite inspections. The inspection reports, after completion, are provided to the inspected banks. As they contain a large amount of confidential information, and they by their very nature tend to have a strong critical tone, the reports are not published. The onsite examination manual has been published and distributed to banks. Increased coordination of supervision is being achieved through participation of offsite examiners in onsite bank inspections. All offsite staff now used the CAMELS rating system to rate banks, hence ensuring the application of common standards and definitions. Work is underway to modify supervisory manuals to cover both onsite and offsite consolidated supervision.

16. Further improvements in the quarterly bank compliance report have been made, and a quarterly report on the condition of the banking sector has been prepared since the third quarter of 1999.

17. The statutory risk-weighted asset to capital ratio was raised to 12 percent at end-1999, and BNB regulation 8 (on capital adequacy) was amended effective May 2000 to apply on a consolidated basis to bank groups. It was also amended to apply a full risk weight to assets secured by commercial real estate and maritime mortgages.

18. A new BNB regulation (number 12) was issued in July 2000 on consolidated bank supervision.

19. A new BNB regulation (number 7) concerning large exposures became effective in November 1999. This regulation provides for consolidated reporting by banks and bank groups, and the authorities believe it fully meets the requirements of the relevant European Directive.

20. BNB regulation number 9, concerning asset risk classification and provisioning, was amended in November 1999. The amendments, inter alia, tightened the definition of highly liquid collateral; required banks to disclose in their annual published reports the methods used to evaluate collateral and their impact on specific provisions, as well as classified and restructured exposures in their portfolios; and required banks to evaluate and classify their exposures to individual countries. The amendments came into force on January 1, 2000, although banks required to increase provisions on claims secured by nonresidential real estate mortgages had until end-September 2000 to comply.

21. A new BNB regulation (number 2) concerning bank permits and licensing, consistent with the current Law on Banks and Law on the BNB, was issued with effect from February 2000.

22. The Law on Measures against Money Laundering was amended in February 2001 to require the BNB, banks, financial houses, and exchange bureaus to identify customers when the amount of currency exchanged in cash exceeds BGN 10,000, or approximately USD 5,000. Heretofore cash transactions were subject to the overall reporting ceiling of BGN 30,000.

23. To facilitate cross-border supervision, Bulgaria has signed memoranda with the bank supervisory authorities of Austria (March 2000) and Cyprus (October 2000). Discussions are underway on memoranda with Greece, Italy, FYR Macedonia, Germany, Albania, and the Slovak Republic. The authorities have found it difficult to negotiate memoranda owing to insufficient clarity of wording, and therefore welcome the December 2000 Basle Committee announcement that it would soon publish a sample supervisory memorandum. A draft of such a sample has already been submitted for countries for discussion.

24. To facilitate cooperation and consultations with the banking industry, the authorities are holding regular discussions and exchanging opinions with an expert group established under the Association of Commercial Banks.

25. The authorities have not adopted a requirement for banks' higher management bodies to take decisions not only on loans for large amounts, but also on loans that are risky or uncommon to the bank, as they believe this would be an administrative intervention in private banking business. Notwithstanding, the BNB approves commercial banks internal rules, containing detailed procedures.

VI. Deposit Insurance

26. The role of the Deposit Insurance Fund (DIF) was further defined in an amendment to the Law on Banks in summer 1999. The new article authorizes the DIF to exercise control over banks where bankruptcy proceeding have been instituted. In an effort to surmount the current legal difficulties that lead to severe delays in the liquidation of failed banks, the legal framework is expected to be significantly improved by the new draft Law on Bank Bankruptcy, which will establish the DIF as the administrative body engaged with bank insolvency. In particular, the draft law would clarify the roles and responsibilities of the DIF and the court system in controlling the activities of trustees in bankruptcy. The aim is to simplify the procedures for liquidation of insolvent bank assets, limit the expenses in the proceedings, and increase the effectiveness of the control over the trustee's acts. The draft law, encompassing also amendments to the Law on Bank Deposit Guaranty (LBDG), passed first reading in parliament in November 2000.

27. Proposed amendments to the LBDG include increasing and simplifying the coverage of deposit insurance (to 100 percent of deposits up to BGN 8,000 or about Euro 4,000) and allowing limited DIF investment in foreign government securities to allow it to hedge foreign exchange risk exposure.

28. The DIF successfully handled the failure of two small commercial banks (January 1999 and February 2000). Payment of the insured amounts was made available within the specified terms and procedures provided by the Law. In both cases, the DIF widely informed the public about the payment procedures and its progress by press releases to the media, press conferences, and interviews.

29. In November 1999, a Memorandum of Understanding was signed by the BNB and the DIF to facilitate the exchange of information. The intent is to allow the DIF to prepare for impending failures and not be taken by surprise when a bank's license in revoked. The BNB provides monthly banks' financial statements and, on a quarterly basis, detailed analysis reports. Information on the distribution of deposits by size for each bank is received twice a year. Additional data (such as ad hoc reports, sanctions imposed on banks, results from on-site inspections, conclusions regarding deposit base calculation, and the determination of premia) are also received. The BNB has also taken the responsibility to inform the DIF immediately when the condition of any bank deteriorates to the point that it imposes a risk to the DIF. Joint onsite inspections are performed in failed banks.

30. In February 2000, the DIF Management Board adopted an investment policy which, inter alia, requires that deposit accounts with commercial banks be fully secured by government securities. As a matter of practice, the DIF does not hold deposits with commercial banks. The 1999 Annual Report, which was widely distributed, portrays the type of investments made by the Fund but not the specific institutions with whom the DIF maintains relationships.

31. The DIF Management Board has adopted a formal policy to have an independent audit of its financial statements. For a second consecutive year, the DIF has engaged an independent international financial auditor for this purpose.

32. In September 2000, the DIF Management Board adopted the DIF Mission Statement, thus prioritizing the broad objectives of the agency. Although DIF internal audit procedures are not currently publicly disclosed, the disclosure of certain internal corporate governance procedures is being discussed.

33. A website is currently under development, and as soon as it is available the Mission Statement will be published, as well as the "questions and answers" brochure on deposit insurance which was distributed to the public via commercial banks in March 2000.

VII. Insurance Supervision

34. Changes to the Law on Insurance effected through amendments to the Law on Money Laundering (January 2001) replaced the Insurance Supervision Directorate with the State Agency for Supervision of Insurance and Gambling under the Ministry of Finance. Regulations on the organization and operation of the new Agency were approved in February 2001.

35. The changes mentioned above, as well as those effected in the Law on Insurance in 1999, clarified the respective roles of the State Agency and the National Insurance Council. Details are available in Article 22 of the revised Insurance Law.

VIII. Securities Market Supervision

36. The new Law on Public Offering of Securities that came into force in January 2000 establishes the legislative basis for the establishment of a modern capital market. The new regulator, the State Commission on Securities, besides handling the responsibilities of the old regulator, issues and revokes permits for asset management companies and determines licensing requirements for investment consultants. The Rules on the Structure and Activities of the Commission, which have been published in the State Gazette, lay out its internal governance procedures. The Commission is subject to audit by the National Audit Office.

37. The Commission issues a regular news bulletin in Bulgarian and English. The bulletin includes republication of ordinances and regulations of interest from the state gazette, reports on the activities of the Commission, and questions and answers from the Commission's practical experience.

1 The principal author of this update is Peter Stella, the resident representative in Sofia.
2 The report was issued to the Executive Board as EBS/00/46. It was a revised version of EBS/99/158, Supplement 1 (August 1999). The March 2000 report is available on the IMF website at http://www.imf.org/external/np/rosc/bgr/index.htm.

Bulgaria ROSC