Abstract
This paper evaluates Bulgaria’s Request for Stand-By Arrangement (SBA). Macroeconomic developments remain broadly favorable, although a rise in the external current account deficit is a concern. Real GDP growth is estimated to have moderated to about 4½ percent in 2001. The authorities have requested a two-year SBA in the amount of SDR 240 million, or 37 percent of quota. The requested SBA would be centered on the currency-board arrangement, a continuation of prudent fiscal and incomes policies, and an acceleration of privatization and other structural reforms.
The Executive Board of the International Monetary Fund (IMF) today approved a two-year stand-by credit for SDR 240 million (about US$299 million) in support of Bulgaria’s comprehensive economic program. The decision will enable Bulgaria to draw SDR 32 million (about US$40 million) from the IMF immediately.
This arrangement will succeed a three-year, SDR 627.6 million (about US$781 million) credit under the Extended Fund Facility (see Press Release 98/44), which expired in September 2001.
Following the Executive Board discussion, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, said:
“The Fund supports the Bulgarian authorities’ economic program centered on the currency board arrangement, prudent and flexible fiscal policy, a strict incomes policy, and privatization and other structural reforms. This program offers good prospects for rapid sustained growth, sound external balances, and lower unemployment and poverty.
“Prospects for 2002 are generally favorable, with output growth expected to reach 4 percent. The external current account deficit is projected to remain at around 6 percent of GDP, mostly financed by foreign direct investment. Nevertheless, it should be monitored closely, in light of the uncertainty surrounding the recovery in Western Europe. Inflation increased in January owing to administrative price hikes and other one-time effects, but should remain subdued in the remainder of the year. The banking sector is well supervised, highly capitalized, profitable, and resilient to foreign exchange and interest rate risks.
“The fiscal deficit target of below 1 percent of GDP in 2002 is appropriate, and the authorities’ intent to reduce the fiscal deficit further over the medium term is welcome. To this end, expenditure pressures should be curbed through a continuation of fiscal and structural reforms, and revenue collection should be enhanced by improvements in tax and customs administration. These measures would create room to strengthen further the social safety net, and gradually lower direct tax rates.
“The incomes policy should be implemented strictly, and labor market flexibility should be improved to maintain competitiveness and enhance growth. In addition, the last two large public banks should be sold to well-qualified strategic investors, structural impediments to private sector credit growth eliminated, and the privatization of non-infrastructure enterprises finalized. Other priorities are to continue with the reforms in health care and education, restructure the transportation and energy sectors with a view to improving efficiency and reducing risks to the budget, liberalize trade further, and develop a public debt management strategy aimed at lowering the debt-to-GDP ratio and reducing portfolio and roll-over risk,” Mr. Sugisaki said.
ANNEX
Recent Developments
Macroeconomic developments have been broadly favorable. Real GDP growth is estimated to have moderated to about 4.5 percent in 2001, as export growth decelerated with the slowdown in the European Union and the crisis in Turkey, and is projected to reach 4 percent this year. Inflation was low during 2001 at 4.8 percent and is expected to remain subdued this year. Unemployment leveled off at around 18 percent in 2001, while real wages increased by 4.5 percent in the first three quarters.
Competitiveness indicators remain adequate and the current account deficit, which increased to about 6.5 percent of GDP in 2001, is projected to narrow to below 6 percent in 2002-03 as a result of a recovery in exports and lower oil prices. The estimated widening of the trade account deficit from 10 percent of GDP in 2000 to 12 percent of GDP in 2001 is largely explained by the slowdown in exports of raw materials and in exports to Turkey and the EU. Bulgaria has established a good track record of macroeconomic stability in the context of a currency-board arrangement (CBA) supported by prudent fiscal policy. In response to the deteriorating current account balance, and given the still high debt-to-GDP ratios, the authorities tightened the fiscal stance in the last quarter of 2001. The growth in monetary and credit aggregates signals a further recovery in money demand and an improvement in lending to the private sector, in the context of a sound banking system. Despite the overall positive performance, several short-term risks and major reform challenges remain. In the short-term, slower-than projected EU growth, a reversal of the oil price decline, or insufficient foreign direct investment would increase external risks, requiring vigilance in policies to maintain macroeconomic stability. Over the medium term, Bulgaria needs to reduce unemployment and poverty, which remain above the first-tier EU accession country. It further needs to remove inefficiencies in the enterprise sector, a low level of financial intermediation, a burdensome bureaucracy, and improve governance.
Program Summary
The authorities’ overall strategy to address the challenges is to continue with prudent fiscal and incomes policies in the context of the CBA, and advance the structural reform agenda. The authorities consider the CBA, which provides a stable nominal anchor and the discipline to maintain tight fiscal and incomes policies, the cornerstone of macroeconomic stability. The authorities are complementing these policies with an acceleration of structural reforms, including in the financial sector, labor markets, enterprise sector, and trade. These policies underlie the authorities’ ambitious macroeconomic framework, targeting strong growth, low inflation, and declining current account deficits and public and external debt-to-GDP ratios.
The authorities’ medium-term fiscal plan supports the CBA and promotes output growth. The authorities are committed to lower the budget deficit gradually from the targeted 0.8 percent of GDP in 2002 to balance in the medium term. This plan will allow to reduce pressure on the external accounts, channel savings to private investment, and decrease the public debt-to-GDP ratio. Within this framework, they are keen to continue to lower taxes on labor and capital while broadening the tax base and enhancing tax administration. The 2002 budget achieves a good balance between the need to lower tax rates and increase social spending within the budget deficit limit. The 2002-03 fiscal stance is fully consistent with macroeconomic stability. In 2002, while the overall deficit is targeted to decline, the primary surplus would be reduced from 3.0 percent of GDP in 2001 to 2.4 percent in 2002. To secure medium-term fiscal viability, the authorities are—in consultation with the World Bank—advancing the reform of the pension system and the health care and education sectors. The government is imposing hard budget constraints on municipalities to end the accumulation of arrears. It is keen to continue with administrative reforms that would improve revenue collection and enhance budget preparation and execution.
Among the structural reforms, the reform agenda in the enterprise sector is key to the authorities’ plan to create a fully market-oriented and competitive economy. The incomes policy for the state enterprise sector and the minimum wage policy are crucial to guiding wage formation and improving the financial situation of sate-owned enterprises. The program envisages measures to improve further the functioning of the labor market to bring down unemployment and safeguard the CBA. In regard to the financial sector, the authorities are committed to finalizing bank privatization, developing further financial intermediation and strengthening prudential supervision to support sustainable credit growth. They are also pursuing a more active debt management strategy. They are committed to accelerating long-delayed reforms in the energy sector, and are continuing the process of trade liberalization.
Bulgaria joined the IMF on September 25, 1990. Its quota1 is SDR 640.2 million (about US$797 million), and its outstanding use of IMF resources currently totals SDR 844.1 million (about US$1.05 billion).
Bulgaria: Selected Economic Indicators, 1996-2001
Average monthly wage in the public (including nonbudgetary) sector.
Includes the republican budget, municipalities, and extrabudgetary funds. The coverage became more comprehensive from 1998 onward, resulting in a structural break.
Domestic debt increased by 2.5 percent of GDP in June 1997 due to a restructuring of central bank claims on government.
Starting 1998, a new methodology was adopted for the calculation of BOP data.
End-of-period, in redenominated leva.
Bulgaria: Selected Economic Indicators, 1996-2001
| 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | ||||||||||
| Output, prices, and employment | (Percent change, from same period of previous year) | |||||||||||
| Real GDP | -10.9 | -6.9 | 3.5 | 2.4 | 5.8 | 4.5 | 5.1 | 4.5 | ||||
| CPI (end-of-period) | 310.8 | 549.2 | 1.7 | 7.0 | 11.4 | 9.1 | 9.5 | 4.7 | ||||
| Monthly, averaged during period | 12.8 | 26.4 | 0.2 | 0.6 | 0.9 | 0.3 | -0.1 | 0.5 | ||||
| Unemployment rate (percent, period average) | ||||||||||||
| Registered unemployment | 11.0 | 14.0 | 12.4 | 13.8 | 18.1 | 18.5 | 17.8 | 16.7 | ||||
| Labor force survey unemployment | 14.2 | 14.4 | 14.1 | 15.7 | 16.9 | 21.6 | 19.4 | 18.6 | ||||
| Retail sales, real (period average) | -36.2 | -30.5 | 2.0 | -2.1 | 0.2 | 2.2 | 2.3 | 2.5 | ||||
| Monthly dollar wages (level) 1/ | 86.3 | 80.5 | 111.0 | 120.6 | 118.0 | 123.1 | 130.5 | 133.3 | ||||
| Public sector wages, real (period average | … | -19.5 | 23.5 | 10.7 | 2.4 | 4.9 | 6.2 | 7.6 | ||||
| Private sector wages, real (period average) | … | … | 22.1 | 9.4 | 11.6 | 3.8 | 2.9 | 3.1 | ||||
| Consolidated government 2/ | (In percent of GDP) | |||||||||||
| Revenue | 31.9 | 36.8 | 39.5 | 40.5 | 40.7 | 44.7 | 48.5 | 31.6 | ||||
| Noninterest expenditure | 22.3 | 29.6 | 34.0 | 37.6 | 37.5 | 38.3 | 42.2 | 30.1 | ||||
| Primary balance | 9.6 | 7.3 | 5.5 | 2.9 | 3.2 | 6.4 | 6.3 | 1.5 | ||||
| Interest payments | 19.7 | 8.5 | 4.4 | 3.9 | 4.3 | 8.4 | 1.8 | 5.5 | ||||
| Overall balance | -10.1 | -1.2 | 1.0 | -1.0 | -1.1 | -2.0 | 4.5 | -4.0 | ||||
| External financing | -2.9 | 0.3 | -0.7 | 0.2 | -1.6 | -3.6 | -1.3 | -5.3 | ||||
| Domestic financing | 15.6 | -2.7 | -2.0 | -1.3 | 1.3 | -0.7 | -10.5 | 8.7 | ||||
| Privatization receipts | 0.2 | 3.2 | 1.7 | 2.2 | 1.4 | 6.3 | 7.4 | 0.6 | ||||
| Total public debt | 117.6 | 109.4 | 96.2 | 88.1 | 84.0 | 74.2 | 73.8 | 72.2 | ||||
| Domestic public debt 3/ | 60.2 | 16.3 | 14.4 | 13.0 | 6.9 | 6.2 | 6.2 | 6.2 | ||||
| Money and credit | (End-of-period; percent change, from same period of previous year) | |||||||||||
| Broad money (millions of leva) | 1,310 | 6,019 | 6,597 | 7,351 | 9,291 | 9,482 | 9,679 | 10,303 | ||||
| Broad money (M3) | 124.5 | 359.3 | 9.6 | 11.4 | 26.4 | 25.8 | 27.7 | 22.9 | ||||
| Lev money | 52.7 | 423.0 | 18.2 | 11.5 | 15.6 | 17.8 | 25.0 | 18.8 | ||||
| Leva credit to nongovernment | 15.6 | 297.2 | 69.7 | 21.4 | 21.4 | 15.6 | 20.0 | 27.9 | ||||
| FX deposits (U.S. dollar millions) | 1,357 | 1,477 | 1,543 | 1,477 | 1,958 | 1,941 | 1,811 | 2,092 | ||||
| FX deposits (percent of M3) | 50.5 | 43.6 | 39.2 | 39.1 | 44.3 | 45.3 | 43.1 | 43.5 | ||||
| Broad money to FX reserves ratio | 3.4 | 1.4 | 1.3 | 1.2 | 1.3 | 1.4 | 1.4 | 1.5 | ||||
| Interest rates (annualized) | (In percent; end-of-period) | |||||||||||
| BNB basic rate | 435.0 | 7.0 | 5.2 | 4.6 | 4.7 | 4.3 | 4.6 | 4.8 | ||||
| Time deposit (leva) | 211.8 | 3.0 | 3.3 | 3.2 | 3.3 | 3.1 | 3.3 | 3.0 | ||||
| Balance of payments 4/ | (In millions of U.S. dollars) | |||||||||||
| Gross official reserves | 793 | 2,474 | 3,056 | 3,222 | 3,460 | 3,080 | 3,040 | 3,120 | 3 | |||
| (In months of imports of GNFS) | 1.6 | 5.0 | 5.6 | 5.0 | 4.9 | 4.3 | 4.2 | 4.3 | ||||
| Current account balance | 131 | 288 | -61 | -652 | -701 | -237 | -185 | -71 | ||||
| (In percent of GDP) | 0.2 | 4.4 | -0.5 | -5.3 | -5.8 | -8.4 | -6.5 | -2.0 | ||||
| Trade balance | 188 | 321 | -381 | -1,081 | -1,175 | -224 | -455 | -407 | ||||
| Exports | 4,890 | 4,809 | 4,193 | 4,006 | 4,812 | 1,282 | 1,232 | 1,298 | ||||
| Imports | 4,703 | 4,488 | 4,574 | 5,087 | 5,988 | 1,506 | 1,683 | 1,705 | ||||
| External debt | 9,602 | 9,760 | 10,274 | 10,204 | 10,371 | 10,117 | 10,052 | 9,889 | ||||
| (In percent of GDP) | 97.7 | 96.2 | 83.8 | 82.3 | 86.5 | 77.7 | 77.2 | 75.9 | ||||
| Exchange rates | ||||||||||||
| Leva per U.S. dollar 5/ | 0.487 | 1.777 | 1.675 | 1.947 | 2.102 | 2.214 | 2.306 | 2.142 | 2 | |||
| (y-o-y percent change, + means depreciation) | 589.3 | 264.5 | -5.7 | 16.2 | 8.0 | 8.2 | 12.7 | -4.0 | ||||
| REER (CPI) (y-o-y percent change, + means appreciation) | -38.8 | 77.5 | 5.2 | 0.8 | 3.2 | 4.9 | 3.6 | 6.0 | ||||
Average monthly wage in the public (including nonbudgetary) sector.
Includes the republican budget, municipalities, and extrabudgetary funds. The coverage became more comprehensive from 1998 onward, resulting in a structural break.
Domestic debt increased by 2.5 percent of GDP in June 1997 due to a restructuring of central bank claims on government.
Starting 1998, a new methodology was adopted for the calculation of BOP data.
End-of-period, in redenominated leva.
Bulgaria: Selected Economic Indicators, 1996-2001
| 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | ||||||||||
| Output, prices, and employment | (Percent change, from same period of previous year) | |||||||||||
| Real GDP | -10.9 | -6.9 | 3.5 | 2.4 | 5.8 | 4.5 | 5.1 | 4.5 | ||||
| CPI (end-of-period) | 310.8 | 549.2 | 1.7 | 7.0 | 11.4 | 9.1 | 9.5 | 4.7 | ||||
| Monthly, averaged during period | 12.8 | 26.4 | 0.2 | 0.6 | 0.9 | 0.3 | -0.1 | 0.5 | ||||
| Unemployment rate (percent, period average) | ||||||||||||
| Registered unemployment | 11.0 | 14.0 | 12.4 | 13.8 | 18.1 | 18.5 | 17.8 | 16.7 | ||||
| Labor force survey unemployment | 14.2 | 14.4 | 14.1 | 15.7 | 16.9 | 21.6 | 19.4 | 18.6 | ||||
| Retail sales, real (period average) | -36.2 | -30.5 | 2.0 | -2.1 | 0.2 | 2.2 | 2.3 | 2.5 | ||||
| Monthly dollar wages (level) 1/ | 86.3 | 80.5 | 111.0 | 120.6 | 118.0 | 123.1 | 130.5 | 133.3 | ||||
| Public sector wages, real (period average | … | -19.5 | 23.5 | 10.7 | 2.4 | 4.9 | 6.2 | 7.6 | ||||
| Private sector wages, real (period average) | … | … | 22.1 | 9.4 | 11.6 | 3.8 | 2.9 | 3.1 | ||||
| Consolidated government 2/ | (In percent of GDP) | |||||||||||
| Revenue | 31.9 | 36.8 | 39.5 | 40.5 | 40.7 | 44.7 | 48.5 | 31.6 | ||||
| Noninterest expenditure | 22.3 | 29.6 | 34.0 | 37.6 | 37.5 | 38.3 | 42.2 | 30.1 | ||||
| Primary balance | 9.6 | 7.3 | 5.5 | 2.9 | 3.2 | 6.4 | 6.3 | 1.5 | ||||
| Interest payments | 19.7 | 8.5 | 4.4 | 3.9 | 4.3 | 8.4 | 1.8 | 5.5 | ||||
| Overall balance | -10.1 | -1.2 | 1.0 | -1.0 | -1.1 | -2.0 | 4.5 | -4.0 | ||||
| External financing | -2.9 | 0.3 | -0.7 | 0.2 | -1.6 | -3.6 | -1.3 | -5.3 | ||||
| Domestic financing | 15.6 | -2.7 | -2.0 | -1.3 | 1.3 | -0.7 | -10.5 | 8.7 | ||||
| Privatization receipts | 0.2 | 3.2 | 1.7 | 2.2 | 1.4 | 6.3 | 7.4 | 0.6 | ||||
| Total public debt | 117.6 | 109.4 | 96.2 | 88.1 | 84.0 | 74.2 | 73.8 | 72.2 | ||||
| Domestic public debt 3/ | 60.2 | 16.3 | 14.4 | 13.0 | 6.9 | 6.2 | 6.2 | 6.2 | ||||
| Money and credit | (End-of-period; percent change, from same period of previous year) | |||||||||||
| Broad money (millions of leva) | 1,310 | 6,019 | 6,597 | 7,351 | 9,291 | 9,482 | 9,679 | 10,303 | ||||
| Broad money (M3) | 124.5 | 359.3 | 9.6 | 11.4 | 26.4 | 25.8 | 27.7 | 22.9 | ||||
| Lev money | 52.7 | 423.0 | 18.2 | 11.5 | 15.6 | 17.8 | 25.0 | 18.8 | ||||
| Leva credit to nongovernment | 15.6 | 297.2 | 69.7 | 21.4 | 21.4 | 15.6 | 20.0 | 27.9 | ||||
| FX deposits (U.S. dollar millions) | 1,357 | 1,477 | 1,543 | 1,477 | 1,958 | 1,941 | 1,811 | 2,092 | ||||
| FX deposits (percent of M3) | 50.5 | 43.6 | 39.2 | 39.1 | 44.3 | 45.3 | 43.1 | 43.5 | ||||
| Broad money to FX reserves ratio | 3.4 | 1.4 | 1.3 | 1.2 | 1.3 | 1.4 | 1.4 | 1.5 | ||||
| Interest rates (annualized) | (In percent; end-of-period) | |||||||||||
| BNB basic rate | 435.0 | 7.0 | 5.2 | 4.6 | 4.7 | 4.3 | 4.6 | 4.8 | ||||
| Time deposit (leva) | 211.8 | 3.0 | 3.3 | 3.2 | 3.3 | 3.1 | 3.3 | 3.0 | ||||
| Balance of payments 4/ | (In millions of U.S. dollars) | |||||||||||
| Gross official reserves | 793 | 2,474 | 3,056 | 3,222 | 3,460 | 3,080 | 3,040 | 3,120 | 3 | |||
| (In months of imports of GNFS) | 1.6 | 5.0 | 5.6 | 5.0 | 4.9 | 4.3 | 4.2 | 4.3 | ||||
| Current account balance | 131 | 288 | -61 | -652 | -701 | -237 | -185 | -71 | ||||
| (In percent of GDP) | 0.2 | 4.4 | -0.5 | -5.3 | -5.8 | -8.4 | -6.5 | -2.0 | ||||
| Trade balance | 188 | 321 | -381 | -1,081 | -1,175 | -224 | -455 | -407 | ||||
| Exports | 4,890 | 4,809 | 4,193 | 4,006 | 4,812 | 1,282 | 1,232 | 1,298 | ||||
| Imports | 4,703 | 4,488 | 4,574 | 5,087 | 5,988 | 1,506 | 1,683 | 1,705 | ||||
| External debt | 9,602 | 9,760 | 10,274 | 10,204 | 10,371 | 10,117 | 10,052 | 9,889 | ||||
| (In percent of GDP) | 97.7 | 96.2 | 83.8 | 82.3 | 86.5 | 77.7 | 77.2 | 75.9 | ||||
| Exchange rates | ||||||||||||
| Leva per U.S. dollar 5/ | 0.487 | 1.777 | 1.675 | 1.947 | 2.102 | 2.214 | 2.306 | 2.142 | 2 | |||
| (y-o-y percent change, + means depreciation) | 589.3 | 264.5 | -5.7 | 16.2 | 8.0 | 8.2 | 12.7 | -4.0 | ||||
| REER (CPI) (y-o-y percent change, + means appreciation) | -38.8 | 77.5 | 5.2 | 0.8 | 3.2 | 4.9 | 3.6 | 6.0 | ||||
Average monthly wage in the public (including nonbudgetary) sector.
Includes the republican budget, municipalities, and extrabudgetary funds. The coverage became more comprehensive from 1998 onward, resulting in a structural break.
Domestic debt increased by 2.5 percent of GDP in June 1997 due to a restructuring of central bank claims on government.
Starting 1998, a new methodology was adopted for the calculation of BOP data.
End-of-period, in redenominated leva.
A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.