Statement by the IMF Staff Representative on Bulgaria

In 1999, Executive Board deliberations on Bulgaria focused on the need for the authorities to persevere with structural reform. Under the currency board arrangement introduced in mid-1997, Bulgaria has achieved macroeconomic stabilization and made substantial progress in structural reform. Banking supervision has improved markedly. Executive Directors stressed the importance of wage moderation and flexible labor markets for maintaining competitiveness and reducing unemployment. The emerging private sector also faces many obstacles, including burdensome bureaucracy and red tape, weak governance, and a banking system hesitant to extend credit.

Abstract

In 1999, Executive Board deliberations on Bulgaria focused on the need for the authorities to persevere with structural reform. Under the currency board arrangement introduced in mid-1997, Bulgaria has achieved macroeconomic stabilization and made substantial progress in structural reform. Banking supervision has improved markedly. Executive Directors stressed the importance of wage moderation and flexible labor markets for maintaining competitiveness and reducing unemployment. The emerging private sector also faces many obstacles, including burdensome bureaucracy and red tape, weak governance, and a banking system hesitant to extend credit.

1. This statement highlights economic and policy developments in Bulgaria since the circulation of the staff report for the Article IV consultation and third review under the extended arrangement (EBS/00/45). This information does not alter the thrust of the staff appraisal.

2. The latest economic data broadly confirm the picture drawn in the staff report. In January, real industrial sales rose by 5.2 percent from a year ago, with sales for exports growing particularly fast, by 28 percent. However, unemployment has continued to increase, reaching 18.1 percent in February. The CPI increased by 3.7 percent in the first two months of 2000, raising year-on-year inflation to 9.1 percent. Average 12-month inflation remains low at 3.5 percent. The pick-up in inflation reflects higher energy prices and the return of food prices to a normal seasonal pattern following an exceptional decline during the previous winter. Regarding the balance of payments, last year’s current account deficit, at US$663 million or 5.4 percent of GDP, turned out to be marginally higher than the staff’s estimate, but was more than fully financed by higher-than-estimated foreign direct investment at US$734 million. On March 24, gross official reserves stood at US$3.0 billion, compared with US$3.2 billion at end-1999.

3. Policy implementation remains generally on track. The prior action on the appointment by the Deputy Prime Minister of a steering committee and a project manager to oversee the design and implementation of the unified revenue agency was completed on March 29. On March 30 the Council of Ministers is expected to establish a tax policy unit in the Ministry of Finance, completing the implementation of this end-1999 structural benchmark. The authorities have also indicated that they expect to complete on time the structural performance criteria for end-March on submitting to the Council of Ministers drafts of an amended Labor Code and key pieces of secondary energy legislation. However, while the legislation to expedite the completion of bankruptcy proceedings passed first reading in parliament already in early March, final parliamentary approval (a structural benchmark for end-March 2000) is now envisaged only in April. Budget execution is on schedule. The general government deficit through March 17 was 43 million leva, well below the program ceiling of 219 million for the first quarter. Revenue collection has continued to be strong, and the indicative target for end-March is likely to be met by a comfortable margin.

4. On March 24, parliament approved the government’s updated Bulgaria 2001 program which outlines the objectives and policies up until the general elections scheduled for no later than April next year. In the economic area, the program emphasizes fighting unemployment and poverty as a key objective, and many of the announced measures to achieve this goal are among the government’s commitments under the extended arrangement with the Fund. However, the program also proposes a freeze on the user price of electricity and district heating until the end of the 2000-01 heating season. In the case of district heating, foregoing the option of raising prices seems premature, since the feasibility of a price freeze can only be assessed once the government has formulated a comprehensive action plan to restructure the district heating sector (Council of Ministers’ approval of such a plan is a structural performance criterion for end-June 2000). Similarly, it is too early to assess the full implications of freezing the price of electricity. Such a freeze would, however, call into question the authorities’ commitment to unifying household and non-household user prices by mid-2001, which would require a sizable increase in household tariffs from the present levels soon after the end of the 2000-01 heating season. The staff is concerned that the proposed price freezes could weaken energy sector reform and put pressure on the budget, and will clarify these issues with the authorities by the time of the next program review.

Bulgaria: Staff Report for the 1999 Article IV Consultation and Third Review Under the Extended Arrangement
Author: International Monetary Fund