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.


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

The Bulgarian authorities welcome the set of papers and would like to express their appreciation for the continued support and candid advice from staff and management. I am pleased to announce to the Board that all quantitative and structural performance criteria, as well as the single prior action have been met. My Bulgarian authorities remain fully committed to carrying forward the reform agenda to ensure sustained economic growth and foster a fully functioning market economy that will lead to lower unemployment and faster convergence to European living standards.

Reform Progress 1997-present

As this is the last review of the EFF-supported program, this is a good occasion to look back and review the results achieved during the EFF and its stand-by predecessor. The reform progress in Bulgaria can best be characterized by two important achievements. First, the authorities have proved their ability to resolve successfully the financial turmoil in 1996 and the beginning of 1997 and to achieve and maintain macroeconomic and financial stability since then. The second achievement is that since the adoption of the currency board arrangement, the Bulgarian authorities have pressed firmly ahead with microeconomic structural reforms and have made significant progress as compared to the period before 1997. There is little doubt in Bulgaria that without this second set of reforms, and without the Fund’s active involvement in them, macroeconomic stability would have been hard to maintain and growth would not have materialized.

The fruits of these reform efforts are now evident in a strong economic recovery. During the last three years, real GDP growth accelerated and exceeded 5 percent in 2000, the highest growth rate achieved since the 1980s. The currency board arrangement has served Bulgaria well: the inflation rate is low, the current account deficit is under control, the external debt burden has been reduced significantly, and official reserves are at comfortable levels. It is also worth mentioning that the economy grew by a cumulative 11 percent during the last three years despite the difficult external environment as the Bulgarian economy was hit by a number of shocks (the global financial crises, the Kosovo conflict, high oil prices, and weather related shocks).

A. Fiscal Policy

Prudent fiscal policy combined with a properly restrictive income policy for state-owned enterprises helped preserve competitiveness of the economy and the viability of the currency board arrangement. To respond adequately to the rapidly changing external environment, the authorities have executed their budget in a prudent and flexible manner. This flexibility consists of releasing only 90 percent of discretionary spending allocations until late in the year, conservative revenue estimates, and special contingency funds. For example in 2000, when a strong U.S. dollar and high oil prices threatened the current account, appropriate fiscal savings prevented second round effects and excessive current account imbalances and resulted in a budget deficit of only 1 percent of GDP. These savings, however, did not result in unsustainable expenditure cuts, as there was ample room resulting from revenue over performance.

A number of structural reforms, outlined in the Memorandum of Economic Policies, have been initiated in order to further improve revenue collection and expenditure management of the budget. The authorities are continuing their efforts to create a Unified Revenue Agency (URA), which will strengthen the revenue collection capacity of the government. They are at an advanced stage of establishing a fully functioning treasury, the implementation of which will improve further expenditure management and budget monitoring. Furthermore, pension reform is proceeding on schedule and health care reform is entering into its second stage.

To support private sector growth and job creation, the 2001 budget envisaged tax cuts that would lower the personal income tax burden by 2 percentage points, the corporate profit tax rates by 5 percentage points and social contribution rates by 3 percentage points. Furthermore, the VAT refund period for nonexporters was reduced, an accelerated depreciation of software products was allowed, custom duties have been reduced and presumptive taxation was alleviated.

B. Microeconomic Restructuring

The authorities have made substantial progress with privatization of state-owned enterprises. By end-2000, 78 percent of state-owned assets excluding infrastructure, and 51 percent of total assets have been privatized. To enhance the transparency of the privatization process, Parliament approved the amendments to the Privatization Act in November 2000. The authorities are working on new strategies to privatize the Bulgarian Telecommunication Company, (BTC) and Bulgartabak.

C. Financial Sector Reforms

The authorities are committed to improving the legal framework to facilitate the functioning of financial markets and to alleviate information asymmetries between banks and small and medium private enterprises. Insolvency procedures have been streamlined by the adoption of the amendment of the Commercial Code in October 2000, the information in the central credit registry is being improved, and creditors’ rights are being strengthened through amendments to the Civil Procedure Code. With the sale of Bulbank, the largest bank, to a strategic foreign investor, 82 percent of the banking sector is now in private hands. The authorities have recently transferred almost all of the remaining state shares in the Central Cooperative Bank to the Bank Consolidation Company, and are going forward with the sale of Biochim bank and further restructuring of the State Savings Bank, SSB.

D. Energy Sector Reform

The Bulgarian authorities recognize that the energy sector needs further restructuring and competition and, despite the nearing elections, have given priority to working with the World Bank on key amendments to the Energy Law. The appropriate amendments have already been submitted to Parliament, meeting the prior action for the completion of the fifth review.

These amendments signal the authorities’ intentions to create a competitive and efficient energy market in Bulgaria. They envisage a separation of policymaking and ownership functions from regulatory and licensing ones among government bodies, while having private companies carry the responsibility and risk for investing in new projects and allowing competitive commercial transactions at all market levels.

E. Business Climate

The authorities believe that the most efficient way to enhance private sector development is to direct their efforts towards improving the business climate. The most important measures in this direction have been (i) the reduction of red tape through the removal or simplification of 121 licensing and regulatory requirements, (ii), the introduction of “one-stop shop” programs in the ministries, districts, and 14 municipalities, (iii) improved quality of public sector services through redesigning the organizational structure of ministries and government bodies.

These impressive results would not have been possible without the strong ownership of and the commitment to the reforms by the Bulgarian authorities and Bulgarian society more broadly. Once seen as a laggard in its transition process, today Bulgaria is a front-runner in the region. My Bulgarian authorities remain fully committed to continue their reform efforts towards sustainable economic growth and a fully competitive market economy and will maintain the momentum of their reform efforts in the pre-election period. In line with these objectives, the authorities’ orientation has shifted from crisis management towards pro-growth policies.

Reform Agenda in the Near- and Medium-Term

The authorities continue to view macroeconomic stability as a necessary condition for the attainment of high and sustainable growth rates. In the context of Bulgaria’s accession to the EU/EMU, the authorities feel that the currency board arrangement remains an appropriate arrangement until joining EMU while maintaining a prudent fiscal policy, external sustainability and the competitiveness of the economy. High growth rates would stimulate faster convergence to European living standards and would ease macroeconomic management.

Fiscal sustainability will continue to be an important objective of the authorities, also because sound fiscal management is crucial for the viability of the currency board arrangement. To ensure fiscal sustainability, the authorities will continue to work on their medium-term fiscal framework, which will be supported by ongoing institutional reforms. The stabilizing role of fiscal policy is achieved through targeting low and prudent fiscal deficits, improving tax administration, introducing a single treasury account, and completing the URA project.

Fiscal policy will remain prudent. In 2001, the government’s strategy is to limit the consolidated budget deficit to at most 1.5 percent of GDP. During the last three years, the Bulgarian authorities have demonstrated their skillful economic management through an adequate and timely policy response to a sequence of external shocks. In 2001, the authorities will continue to maintain the built-in flexibility of the budget, will implement the 2001 budget conservatively and will stand ready to respond adequately to any unforeseen inflationary pressures or current account deterioration.

Improved enterprise access to credit is another important precondition for healthy private sector growth. Because bank financing plays a dominant role on the domestic financial market, it will be important to stimulate banks’ credit activity beyond the supply of short-term credits. An increase of bank competition can stimulate the supply of long-term bank credits, necessary to finance business investment.

Transparency and the Observance of International Standards and Codes

Bulgaria has made considerable efforts to improve the formulation of economic policies and to disseminate information on these policies and their outcome to the public. The government has aimed at increased transparency in economic and social statistics, in fiscal, monetary, and financial policy, and banking supervision. Bulgaria is a participant in the GDDS (General Data Dissemination System). The GDDS metadata for Bulgaria are being circulated to other countries in the region as an example. Moreover, the authorities participated in the preparation of a Report on Observance of Standards and Codes (ROSC), covering data dissemination, fiscal transparency, monetary and financial policy transparency and bank supervision, which was published last year. An update of this report has been issued to the Board, and will be published shortly.

Pursuant to their policy of transparency, the Bulgarian authorities intend to publish the entire set of documents for the 2000 Article IV Consultation as well as for the final review of the extended arrangement.

Finally, the Bulgarian authorities wish to express their gratitude for the strong support and cooperation they have continued to receive from the Fund staff through their regular missions. As the staff notes, Bulgaria has made extensive use of Fund technical assistance, and has used this assistance effectively.