IMF Completes Third Review and Approves US$37 Million Disbursement Under Stand-By Arrangement for Bulgaria

Bulgaria's macroeconomic performance, in the face of the prolonged slowdown in the EU, has been impressive, but further efforts are required. The government's fiscal policy has underpinned recent economic success, and pressures to loosen such policies should be resisted. Fiscal reforms have progressed, but momentum needs to be maintained for some time to come. Robust growth can be sustained over the medium term only with a revitalization of structural reforms. The rapid growth in credit to the private sector is welcome, but presents challenges.

Abstract

Bulgaria's macroeconomic performance, in the face of the prolonged slowdown in the EU, has been impressive, but further efforts are required. The government's fiscal policy has underpinned recent economic success, and pressures to loosen such policies should be resisted. Fiscal reforms have progressed, but momentum needs to be maintained for some time to come. Robust growth can be sustained over the medium term only with a revitalization of structural reforms. The rapid growth in credit to the private sector is welcome, but presents challenges.

The Executive Board of the International Monetary Fund (IMF) has completed the third review of Bulgaria’s economic performance under its Stand-By Arrangement. The decision will enable Bulgaria to draw SDR 26 million (about US$37 million) from the IMF immediately.

The two-year Stand-By Arrangement was approved on February 27, 2002 (see Press Release No. 02/12) in a total amount of SDR 240 million (about US$337 million). So far, Bulgaria has drawn SDR 136 million (about US$191 million) under the Stand-By Arrangement from the IMF.

Following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

“Macroeconomic performance continues to be strong in Bulgaria, despite a weak external environment. The authorities’ economic program, centered on the currency board and supported by a prudent fiscal policy and a strict wage policy for state-owned enterprises, has contributed to robust growth, subdued inflation, a strong external position, and, recently, a decline in unemployment. Structural reform has advanced in a number of areas, including the energy and railway sectors, tax administration and the sale of the last major state-owned bank. More decisive progress in other key areas will, however, be needed to improve the business and investment environment and ensure broad-based, sustainable growth over the medium term.

“The authorities’ strong fiscal performance is commendable, and their continued commitment to a prudent fiscal policy, and its flexible implementation should the external position worsen, will help ensure that the 2003 budget deficit ceiling of 0.8 percent of GDP is observed. Anticipated spending overruns in municipalities and health care can be covered this year by an expected revenue overperformance, but more fundamental reforms will be required to address these issues in the context of the 2004 budget. Over the medium term, the strategy to balance the budget by 2005 while lowering the tax burden and allowing for higher social and EU-related spending remains appropriate. To achieve these goals, efforts to strengthen tax administration and rationalize subsidies and unproductive spending should continue.

“The sharp rise in credit to the private sector from a low base has contributed to the current strong economic performance. To ensure that the banking system remains sound, the Bulgarian National Bank has appropriately intensified its already-strong supervision and enhanced monitoring of foreign currency lending.

“A reinvigoration of the structural reform effort will enable Bulgaria to achieve sustained robust growth and improved living standards. Reforms to improve corporate governance, strengthen the judiciary, simplify business regulations, and increase labor market flexibility will be key to attracting more investment and reducing unemployment further. Completion of the privatization program, including the privatization of the tobacco holding and telecommunications company, in an expeditious and transparent manner will also be important to strengthen investor confidence,” Ms. Krueger said.

Bulgaria: Third Review Under the Stand-By Arrangement and Request for Waiver of Applicability of Performance Criteria
Author: International Monetary Fund