Abstract
Bulgaria’s currency board arrangement continues to have broad political and public support and shows no signs of strain, as interest rates are low and stable, fiscal reserves ample, and banks liquid. A structural reform agenda has also been implemented. The authorities have improved banking supervision, started the overhaul of the pension and health care systems, and liberalized trade and prices. Executive Directors stressed the need to strengthen the bank supervision and corporate governance to reduce the perceived risks of lending to the private sector.
March 23, 2001
1. This statement provides an update of economic and policy developments in Bulgaria since the circulation of the staff report for the 2000 Article IV consultation and fifth review under the extended arrangement (EBS/01/28). This information does not alter the thrust of the staff appraisal.
2. The latest data broadly confirm the picture drawn in the staff report. In January, industrial export sales rose by 7 percent year on year, led by electricity, chemicals, and tobacco. However, total industrial output registered a 6.5 percent year-on-year decline, in part owing to the closure of inefficient mines. Unemployment at 18.7 percent in February remains high, but seasonally adjusted figures indicate that the downward trend since the mid-2000 peak has continued. 12-month inflation eased to 8.5 percent in February, in part reflecting the moderation of energy prices. The current account position in January was comfortable. On a comparable basis (counting the US$135 million fee from the second GSM license as a capital account item), the US$155 million deficit was well below that in the same month a year ago (US$245 million). The improvement is attributable to a reduction in the trade deficit by US$70 million, owing to continued robust export growth (21 percent year on year in U.S. dollar terms) and stable imports (a slight decline of 1 percent).
3. Policy implementation remains on track. The government completed the prior action by submitting to parliament a draft package of amendments to the Energy Act agreed with the World Bank (Council of Ministers’ Decision 121 of March 13). Fiscal performance in 2001 so far has been broadly in line with projections. Through end-February, the general government primary position was close to balance, with an overall deficit of 343 million leva (1.2 percent of annual GDP). With a seasonal surplus expected in March, the first-quarter deficit target of 217 million leva is within reach, but achieving it will require strict control over expenditure. In the first two months, total revenue was in line with projections, although collections from the profit tax and VAT were somewhat weaker than projected. Expenditure was kept under control, with the authorities limiting monthly transfers for discretionary spending to at most 90 percent of the budgeted amounts, as planned. In the structural area, the government on March 8 completed the transfer of a 32.77 percent stake in the Central Cooperative Bank to the Bank Consolidation Company. Regarding the sale of Biochim bank, the authorities have made further progress in negotiations with the sole bidder, and aim to agree on a price by April 5.