Bulgaria: Fourth Review Under the Stand-By Arrangement, Requests for Waiver of Applicability of Performance Criteria and Waiver of Nonobservance of Performance Criterion, and Request for Extension of the Arrangement—Staff Report; Staff Statement; and Press Release on the Executive Board Discussion
In the context of the fourth review under the Stand-By Arrangement and request for waiver of performance criteria and waiver of nonobservance of performance criterion, and request for extension of the Arrangement, the following documents have been released and are included in this package:
the staff report for the fourth review under the Stand-By Arrangement, requests for waiver of applicability of performance criteria and waiver of nonobservance of performance criterion, and request for extension of the Arrangement, prepared by a staff team of the IMF, following discussions that ended on November 25,2003, with the officials of Bulgaria on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 15, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement of February 4, 2004 updating information on recent developments.
a Press Release summarizing the views of the Executive Board as expressed during its February 4, 2004 discussion of the staff report that completed the review.
The documents listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of Bulgaria*
Memorandum of Economic and Financial Policies by the authorities of Bulgaria*
*May also be included in Staff Report
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Fourth Review Under the Stand-By Arrangement, Requests for Waiver of Applicability of Performance Criteria and Waiver of Nonobservance of Performance Criterion, and Request for Extension of the Arrangement
Prepared by the European Department
(In consultation with other departments)
Approved by Susan Schadler and John Hicklin
January 15, 2004
II. Background and Recent Developments
III. Report on the Discussions
A. The Macroeconomic Outlook and Risks
B. Fiscal Policy
C. Financial Sector Policies
D. Other Structural Reforms
E. Monitoring and Review Issues
F. Data and Transparency Issues
IV. Staff Appraisal
1. Why is Private Sector Credit Growth Likely to Slow?
2. Alternative Measures of the Fiscal Stance
1. Real Sector Indicators, 2000-2003
2. Real Sector Developments, 1999-2003
3. Real Broad Money and Credit Growth, 1997-2003
4. Money and Financial Indicators, 1996-2003
5. Composition of Current Account, 2001-2003
6. External Sector Developments, 1998-2003
7. Current Account and Credit Growth in Selected Countries, 2003 Q3
8. FDI Coverage of Current Account, 2001-2003
9. Indicators of Competitiveness, 1998-2003
10. Baseline Medium-Term Projections, 1999-2008
1. Selected Economic Indicators, 1999-2003
2. Monetary Survey, 1999-2004
3. Balance of Payments, 1999-2004 (in euros)
4. Balance of Payments, 1999-2004 (in U.S. dollars)
5. Selected Vulnerability Indicators, 2000-2003
6. General Government, 1999-2004 (in leva)
7. General Government, 1999-2004 (in percent of GDP)
8 Macroeconomic Framework, 1999-2008
9. Balance of Payments, 2001-2008 (in euros)
10. Balance of Payments, 2001-2008 (in U.S. dollars)
12. External Sustainability Framework—Gross External Financing Need, 1998-2008
13. Public Sector Debt Sustainability Framework, 1998-2008
14. Public Sector Debt Sustainability Framework—Gross Public Sector Financing Need, 1998-2008
15. Schedule of Purchases Under the Stand-By Arrangement, 2002-04
I. Tentative Work Program
II. World Bank Relations
III. Fund Relations
IV. Statistical Issues
16. World Bank Operations
18. Technical Assistance, 1998-2003
19. Core Statistical Indicators as of January 8, 2004
I. Letter of Intent and Supplementary Memorandum on Economic Policies of the Government of Bulgaria
Background: Despite increased external risks, macroeconomic developments have been generally favorable, and the program remains largely on track. In the first nine months of 2003, the economy grew at over 4 percent, supported by strong domestic demand, with average inflation at 2 percent and a declining unemployment rate. The external current account deficit has widened to over 8 percent of GDP, reflecting partly the effect on imports of very high growth in credit to the nongovernment sector. However, FDI inflows have been strong, reserves are rising, and competitiveness appears adequate. Despite the increase in credit, prudential indicators do not yet show signs of deterioration. A tight fiscal policy has helped contain this external imbalance; in the first three quarters of the year, the budget recorded a surplus of 2½ percent of projected 2003 GDP, compared to the programmed deficit for the period of 0.2 percent of GDP. While two large privatizations and some fiscal structural measures have been delayed, reforms in other areas have gained traction. The extremely low popularity level of the government, however, may affect the momentum of further reforms.
Discussions: Discussions focused on policies to contain the risks associated with the widening current account deficit and rapid credit growth, and on advancing structural reforms. The authorities indicated they would achieve a balanced budget for 2003 compared with a program deficit target of 0.7 percent of GDP. With respect to 2004, while political considerations precluded changes from the deficit target of 0.7 percent of GDP, the authorities will maintain sufficient flexibility to achieve a balanced budget should external conditions warrant. The authorities also expressed their intention to fully fund municipal mandates, a key step toward adequate fiscal decentralization that would reduce chances for spending overruns, and to take measure to restructure the railways and energy sectors to help limit subsidies. Staff registered their strong opposition to proposals to allocate resources from the Fiscal Reserve Account (FRA) to capitalize various state enterprises. In response, the authorities decided to forego capitalization of the road fund until later in 2004, and then proceed only if macroeconomic conditions permit and in consultation with staff. While noting that the increase in banking sector intermediation was a welcome development, the authorities are strengthening supervisory oversight and standards to encourage prudent lending, thus slowing down credit growth. Moreover, the government is also shifting its deposits currently in commercial banks back to the BNB. Staff urged further progress in the implementation of structural reforms, highlighting their importance in terms of reducing the strain on the budget and improving the business climate.
Staff appraisal: The response of fiscal policy to growing risks has been adequate, though not ideal. More could have been done during 2003 to constrain spending, and a neutral fiscal stance for 2004 would have been desirable. The authorities should refrain from relying on state enterprises using extrabudgetary funds to carry out public sector activities, and reinvigorate their fiscal reform program. Further impetus to complete the remaining fiscal and structural reforms should spur growth and enhance readiness to join the EU. Measures introduced by the authorities to maintain the health of the banking system are commendable.
Bulgaria: Fourth Review Under the Stand-By Arrangement, Requests for Waiver of Applicability of Performance Criteria and Waiver of Nonobservance of Performance Criterion, and Request for Extension of the Arrangement