This paper assesses Bulgaria’s 2002 Article IV Consultation, First Review Under the Stand-By Arrangement (SBA), and a Request for Waiver of Non-observance and Waiver of Applicability. The authorities’ structural reform program is ambitious, but implementation needs to be stepped up. In particular, although the energy sector reform program aims appropriately at privatization and increased competition, delays in restructuring district heating companies and increasing energy prices toward cost-recovery levels need to be overcome. The IMF staff supports the authorities’ request for completion of the first program review under the SBA.


This paper assesses Bulgaria’s 2002 Article IV Consultation, First Review Under the Stand-By Arrangement (SBA), and a Request for Waiver of Non-observance and Waiver of Applicability. The authorities’ structural reform program is ambitious, but implementation needs to be stepped up. In particular, although the energy sector reform program aims appropriately at privatization and increased competition, delays in restructuring district heating companies and increasing energy prices toward cost-recovery levels need to be overcome. The IMF staff supports the authorities’ request for completion of the first program review under the SBA.

On July 22, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1


Bulgaria has made a rapid recovery from the crisis it suffered in 1996–97. A robust turnaround took hold in 1998 and by end-2001, real GDP had increased by 16½ percent over four years, inflation had been lowered from near-hyperinflation levels to single digits, and external debt had declined from more than a 100 percent of GDP to 70 percent of GDP. These results owe to a policy framework anchored on a currency board arrangement and featuring a prudent fiscal policy, strict incomes policies for state-owned enterprises, and a comprehensive structural reform program aimed at creating a fully-functioning and competitive market economy. The currency board continues to enjoy broad support domestically and has engendered confidence in foreign investors, contributing to its continued viability. In support of the CBA, fiscal policy has been cautious and flexible, allowing the fiscal deficit to decline to near balance. In the same vein, caps put on the wage bills of struggling state-owned enterprises have contributed to moderate wages increases in the economy, keeping inflation in check and safeguarding Bulgaria’s competitiveness. Significant progress has been made in reforming the economy. Almost all non-infrastructure enterprise assets and four fifths of bank assets have been privatized; bank supervision has been improved; trade and price liberalization have been achieved; and the overhaul of the pension and health care systems is well advanced. However, progress has been more limited in improving the efficiency of the public administration, and in rationalizing the health care and education systems. Also, key enterprises have yet to be privatized and the pace of reforms in the energy and transportation sectors has been slow. In addition, Bulgaria still has to reform key institutions and laws to increase the country’s attractiveness as a place to do business.

Policy implementation in 2001–2002 remained strong in the face of unfavorable external developments. Consistent with its policy framework, Bulgaria has maintained a prudent fiscal policy, with the general government registering a small deficit of 0.9 percent of GDP in 2001 and a surplus of about 0.9 percent of GDP through June 2002. Also, strict wage ceilings were maintained on public enterprises. In early 2002, Bulgaria conducted a debt swap operation, which limited external risks by reducing the face value of the debt, lengthening the maturity structure, and increasing the share of Euro-denominated and fixed interest rate instruments. Progress in restructuring the economy included passage of the privatization law, issuance of tenders for the sale of several key public enterprises, and reforms in the energy sector. The latter included notably, increases in electricity and district heating prices toward cost-recovery levels and preparations for the privatization of the electricity distribution companies.

Macroeconomic performance in 2001–2002 has been good. Despite the slowdown in Bulgaria’s main trading partners, particularly the European Union (EU), 12-month real GDP growth reached 4 percent in 2001 and 3.2 percent in the first quarter of 2002, slightly lower than at the end of the same quarter in 2001. Year-on-year inflation accelerated moderately from 4.8 percent at end-2001 to 5.2 in end-June 2002, reflecting temporary factors, including increases in administrative prices, but underlying inflation remains low. The external current account deficit in 2001 amounted to 6½ percent, as an improvement in the income balance was offset by a widening trade deficit, but was largely covered by foreign direct investment. In this context, gross international reserves, at US$3.6 billion, continued to cover 5 months of prospective imports of goods and nonfactor services. So far in 2002, the external current account deficit remains on pace for a similar outcome as in 2001. While the income balance is due to improve owing to lower external interest payments, the trade balance is expected to widen mainly due to lower exports. Lackluster foreign direct investment in the first quarter of 2002 partly reflected the timing of privatization and the import cover of gross international reserves is expected to remain at close to 5 months. Bulgaria’s competitiveness remains adequate, as its market share in the EU has continued to expand and the appreciation of the real effective exchange rate in 2001 and early 2002 was in line with productivity gains relative to Bulgaria’s main trading partners.

Bulgaria continues to face challenges to sustain high-quality growth. High unemployment and poverty levels have to be reduced to increase living standards and preparations for EU accession still have a long way to go. Also, the country remains vulnerable to exogenous shocks. To overcome these challenges, Bulgaria would need to keep its discipline in implementing macroeconomic policies and accelerate the implementation of crucial structural reforms to increase the efficiency of the economy.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They acknowledged the impressive progress made by Bulgaria since the adoption in 1997 of a policy framework centered on a currency board arrangement (CBA), prudent fiscal and incomes policies, and comprehensive structural reforms. Nevertheless, the country continues to face challenges. Although growth has been robust, unemployment remains high, and poverty is above the levels of before the 1996–97 crisis. External debt and the external current account deficit also remain high, and the economy is vulnerable to exogenous shocks. Directors agreed that further structural reforms need to be implemented in key areas in order to strengthen the economy’s productivity and competitiveness in preparation for EU accession.

Directors supported the approach taken by the government to deal with these challenges, namely, continued adherence to the CBA, supported by prudent macroeconomic policies and an acceleration of structural reforms. In this context, the authorities’ response to heightened external risks during the past nine months had been appropriate. Despite the prolonged slowdown in the EU and declining foreign direct investment, the authorities had met—with comfortable margins—their fiscal deficit target for the first quarter of 2002, had adopted contingent fiscal measures to cope with further potential stress during the rest of the year, and had resisted demands for additional increases in public sector wages. Directors underscored that the completion of the restructuring of the economy would increase the flexibility to deal with future shocks.

Directors considered that Bulgaria’s prospects for 2002 were good, but depended on the strength of the recovery in the EU and continuation of a cautious and flexible fiscal policy. A delayed recovery in the EU, higher oil prices, and delays in the privatization of large state enterprises could worsen the external outlook. The authorities should stand ready to implement the agreed contingent fiscal measures, if needed.

Directors encouraged the authorities to implement measures to further promote competitiveness and improve the business climate. Strict limits on the wage bill of public enterprises help keep inflation low and promote restructuring in the state-owned sector, while guiding wage formation in the broader economy. Bulgaria’s competitiveness remains adequate, but it needs to continue to be monitored closely, and additional measures are needed to increase labor market flexibility. Directors welcomed the recent passage of the privatization law, which increases transparency in the privatization process, and encouraged the authorities to accelerate pending reforms, notably the strengthening of corporate governance and the simplification of foreclosure procedures, that would make Bulgaria a more attractive place in which to do business. More generally, Directors encouraged the authorities to strengthen the legal and institutional framework to discourage rent-seeking activities and facilitate sound investment decisions.

Directors commended the authorities for their prudent public debt management, particularly the recent Brady bond swap, which helped improve the external debt profile. They encouraged the authorities to continue their conservative approach to contracting and guaranteeing external public debt.

Directors considered the government’s medium-term fiscal strategy appropriate, but cautioned that its successful implementation would hinge on an acceleration of structural and public sector reforms. They agreed with the authorities’ pro-growth policy of lowering income tax and social security contributions, while strengthening spending in key areas, including for the social safety net and EU accession. Reaching a balanced budget by 2005 is also a desirable objective. However, in order to achieve these goals, the authorities need to accelerate structural reforms, cut subsidies and less productive expenditures, and improve tax administration and expenditure management. In this context, Directors advised the authorities to speed up preparations for making the Unified Revenue Agency operational in 2003, as planned.

Directors encouraged the authorities to step up the implementation of other aspects of their ambitious structural program. In particular, they urged the authorities to accelerate the restructuring of the district heating companies, continue to increase energy prices toward cost recovery levels, and enhance efficiency in education and health care. They also stressed the need to accelerate the privatization of large state-owned enterprises. Directors were concerned that efforts to set up public venture capital funds might mark a weakening in the structural reform agenda, which they stressed should remain sharply focused on encouraging a high level of sustainable investment and growth. Similarly, the authorities were urged to refrain from unduly using the tax system to stimulate specific industries.

Directors expressed satisfaction with the soundness of the financial sector and strength of supervision, but recommended that the authorities redouble their vigilance to ensure that the system withstands the risks associated with the recent more rapid growth in private sector credit. Directors welcomed the positive developments in bank privatization, but stressed the importance of the adoption by parliament of the bank bankruptcy law before its summer recess. Directors urged the authorities to implement the recommendations of the Financial Sector Assessment Program mission.

Directors noted that the strengthening of the Financial Investigation Bureau would complement the existing legal and regulatory framework for countering money-laundering and the financing of terrorism.

Directors welcomed the quality and timeliness of the data provided by the Bulgarian authorities, while urging them to address the remaining weaknesses. They encouraged the authorities to participate in a data quality module of the Report on the Observance of Standards and Codes, with a view to eventual participation in the Special Data Dissemination Standard.

It is expected that the next Article IV consultation with Bulgaria will be held on a 24-month cycle, subject to the provisions of the decision on consultation cycles approved on July 15, 2002.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

Bulgaria: Selected Economic Indicators

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Sources: Bulgarian authorities; and IMF staff estimates


The currency board arrangement fixed the exchange rate at 1,000 leva=1 DM through end-1998 and 1,955.83 leva = 1 Euro since January 1, 1999. On July 5, 1999, the lev was redenominated by removing three zeroes.

Annual average level.



Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

Bulgaria: Staff Report for the 2002 Article IV Consultation and First Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance and Waiver of Applicability
Author: International Monetary Fund