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
Author: International Monetary Fund
Publication Date:
12 Feb 2004
eISBN:
9781451804386
Language:
English
Keywords:
ISCR; CR; December inflation; clearance operation; BTC; percent of GDP; current account deficit; U.S. dollar; GDP deflator; short-term debt; Current account deficits
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Bulgaria's macroeconomic performance in the face of the prolonged slowdown in the EU has been impressive, but risks have intensified. The response of fiscal policy to these risks has been adequate. Plans to increase reliance on state enterprises to carry out public sector activities are worrying. The government has taken the right approach to addressing the rapid growth in private sector credit. Bulgaria has made good progress on its structural reform agenda, but an intensified effort is required to help deal with greater macroeconomic risks.

Abstract

Bulgaria's macroeconomic performance in the face of the prolonged slowdown in the EU has been impressive, but risks have intensified. The response of fiscal policy to these risks has been adequate. Plans to increase reliance on state enterprises to carry out public sector activities are worrying. The government has taken the right approach to addressing the rapid growth in private sector credit. Bulgaria has made good progress on its structural reform agenda, but an intensified effort is required to help deal with greater macroeconomic risks.

I. Introduction

1. A staff team1 visited Sofia during November 12-25, 2003 to conduct discussions on the fourth and final review under the Stand-By Arrangement (SBA). The two-year arrangement for SDR 240 million (37 percent of quota) was approved on February 27, 2002. Seven of nine planned purchases totaling SDR 188 million have been made to date, and an additional SDR 26 million would become available upon completion of this review. The authorities have indicated their interest in a successor precautionary SBA, and discussions could begin in March 2004, following the preparation of an ex post assessment of Bulgaria’s experience as a prolonged user of Fund resources.

2. The program remains largely on track, but there have been slippages in certain areas. All performance criteria under the program have been met with the exception of the end-September and likely end-December performance criterion on tax arrears collection by the General Tax Directorate (GTD) (Tables 1-2 of Attachment I). Several indicative targets on arrears to the electricity company (NEK) were missed as well [¶ 2].2 Most structural benchmarks have been met, but end-September and end-December benchmarks related to tax administration and expenditure management reforms were not fully observed.

Table 1.

Bulgaria: Selected Economic Indicators, 1999-2003

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Sources: Bulgarian authorities; and staff estimates.

Domestic debt as reported by Ministry of Finance and external debt as reported by BNB, in percent of GDP.

Starting in 2002, a new format was adopted for monetary data resulting in revisions to historical series.

Trade credits have been added to private debt starting in 2000.

End-of-period, in redenominated leva.

Table 2.

Bulgaria: Monetary Survey, 1999-2004

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Sources: Bulgarian National Bank; National Statistical Institute; and staff estimates

1/ In May 2002, monetary data were recast to exclude non-operating banks from the consolidated banking system. Changes included also the reclassification of deposits by social security funds and local governments into broad money, which increase broad money and lowered NDA by an equal amount.

3. Weak popularity and an erosion of the coalition’s cohesion has complicated implementation of the government’s economic program, but the political situation remains stable. Following the poor performance of the senior coalition member in recent local elections, the junior party—mainly representing the Turkish minority—has stepped up demands, including for additional budget expenditures. Nevertheless, the government has succeeded in maintaining a tight fiscal stance and in advancing several difficult reforms. Further, there appears to be little appetite across the political spectrum for early elections, and a consensus to maintain the currency board arrangement (CBA) and advance the EU accession process should help ensure that policies remain broadly on track.

II. Background And Recent Developments

4. Macroeconomic developments have been generally favorable, but external risks have increased.

  • Economic activity remains robust and inflation low (Table 1, Figures 1-2). Real GDP growth reached 4¼ percent in first three quarters of 2003, led by a sharp increase in private consumption and investment. Monthly data on industrial production and sales suggest that growth may have accelerated in the last quarter of 2003. The unemployment rate has continued its decline, reaching 13.2 percent in November 2003. Meanwhile, while year-on-year growth in the CPI rose to 5 percent in November, reflecting a jump in food prices, inflation averaged 2 percent in 2003 (year-to-date), helped by the appreciation of the euro against the U.S. dollar.

  • Private sector credit growth remains very strong (Table 2, Figure 3-Figure 4). Growth in bank claims on the nongovernment sector eased slightly in November, but remained very high at 42½ percent year-on-year in real terms. In the 12 months to November, claims have jumped by over 7 percentage points of estimated 2003 GDP to 26.4 percent, with household credit—both mortgage and consumer loans—being the most dynamic component. Prudential indicators—though admittedly providing lagging signals of asset quality—do not yet show signs of deterioration, and banks are reporting strong profits.

  • The external current account deficit has widened (Table 3-4, Figure 5-6). The twelve-month external current account deficit (in euro terms) increased to nearly 8½ percent of GDP in October, due mainly to a credit-induced import boom. Broadly similar trends have been observed in a number of other transition countries (Figure 7). Driven by both consumer and investment goods, as well as high oil prices, merchandise imports rose 17 percent in the year to October, outpacing export growth of 11 percent. In addition, the income balance deteriorated, reflecting higher profit remittances. The current account deficit is likely overestimated, but the extent of overestimation is not clear and, in any case, the trend in the external balance is clearly a source of concern.3

  • However, FDI inflows have been strong, reserves are rising, and competitiveness appears adequate. FDI has covered 84 percent of the current account deficit in the twelve months to October (Figure 8). For the year as a whole, coverage of 87 percent is expected, with non-privatization related inflows covering about two-thirds. The stronger-than-expected FDI, combined with commercial banks’ repatriation of foreign assets and other private sector inflows allowed gross international reserves to rise to € 5.3 billion at end-October, well above programmed levels and more than twice the stock of short-term external debt. Gains in EU market share and modest wage increases suggest that Bulgaria has maintained its competitiveness but, in light of the growing current account deficit and the euro’s sharp appreciation, this warrants continued scrutiny (Figure 9). Financial market confidence remains strong, as evidenced by the continued decline in spreads on the Bulgaria component of the EMBI+ index to about 160 basis points (Table 5).

Figure 1.
Figure 1.

Real Sector Indicators, 2000-2003

Citation: IMF Staff Country Reports 2004, 035; 10.5089/9781451804386.002.A001

Figure 2.
Figure 2.

Bulgaria: Real Sector Developments, 1999-2003

Citation: IMF Staff Country Reports 2004, 035; 10.5089/9781451804386.002.A001

Source: Bulgarian Authorities; and Fund staff estimates and projections.
Figure 3.
Figure 3.

Figure 3. Real Broad Money And Credit Growth, 1997-2003

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2004, 035; 10.5089/9781451804386.002.A001

Figure 4.
Figure 4.

Bulgaria: Money and Financial Indicators, 1996-2003

Citation: IMF Staff Country Reports 2004, 035; 10.5089/9781451804386.002.A001

Source: The Bulgarian National Bank; Bloomberg; and Fund Staff calculations.
Table 3.

Bulgaria: Balance of Payments, 1999-2004

(In millions of euros)

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Sources: Bulgarian authorities, and Fund staff estimates.

All FDI is assumed non-debt creating.

Excluding valuation changes.

According to expectations schedule.

Historical figures include valuation changes. Differences between annual and fourth-quarter end-of-period figures are due to valuation changes carried forward.

External debt minus gross foreign assets of the banking system.

Includes obligations to the Fund.

Based on quarterly average exchange rates.

Table 4.

Bulgaria: Balance of Payments, 1999-2004

(In millions of U.S. dollars)

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Sources: Bulgarian authorities, and Fund staff estimates.

All FDI is assumed non-debt creating.

Excluding valuation changes.

According to expectations schedule.

Historical figures include valuation changes. Differences between annual and fourth-quarter and-of-period figures are due to valuation changes carried forward.

External debt minus gross foreign assets of the banking system.

Includes obligations to the Fund.

Based on quarterly average exchange rates.

Figure 5.
Figure 5.

Composition of Current Account, 2001-03

Citation: IMF Staff Country Reports 2004, 035; 10.5089/9781451804386.002.A001

Figure 6.
Figure 6.

Bulgaria: External Sector Developments, 1998-2003

Citation: IMF Staff Country Reports 2004, 035; 10.5089/9781451804386.002.A001

Source: Bulgarian Authorities; and Fund staff estimates.
Figure 7.
Figure 7.

Current Account and Credit Growth in Selected Countries, 2003 Q3

Citation: IMF Staff Country Reports 2004, 035; 10.5089/9781451804386.002.A001

1/ Lithuania data is Q2.2/ Credit to nongovernment
Figure 8.
Figure 8.

FDI Coverage of Current Account, 2001-03 (12-month)

Citation: IMF Staff Country Reports 2004, 035; 10.5089/9781451804386.002.A001

Figure 9.
Figure 9.

Bulgaria: Indicators of Competitiveness, 1998-2003

Citation: IMF Staff Country Reports 2004, 035; 10.5089/9781451804386.002.A001

Sources: National Statistical Institute; Direction of Trade Statistics; and Fund staff estimates.1/ Bulgaria, Czech Republic, and Hungary: Authorities’ data; and Romania: Direction of Trade Statistics.
Table 5.

Bulgaria: Selected Vulnerability Indicators, 2000-2003

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Sources: Bulgarian authorities; and Fund staff estimates.

Staff projections or actual data for period indicated in the next column.

The latest figure is the 12-month rate of inflation as of the indicated period.

12-month current account in percent of 12-month GDP.

12-month net FDI inflows in percent of 12-month GDP.

Year-on-year growth rate.

2003: In percent of projected annual GDP.

General government.

2003: Cumulative balance up to Q3 in percent of projected annual GDP.

Public sector gross debt minus balance of the fiscal reserve account.

Commercial banks.

Total loans exclude interbank loans. Non-performing loans including watch, substandard, doubtful, and loss.

Does not include off-balance sheet items.

5. Fiscal policy has been tight, helping to contain the external imbalance. In the first three quarters of the year, the budget recorded a surplus of 2½ percent of projected 2003 GDP, significantly better than the programmed 0.2 percent deficit for this period (Table 6-7). Two-thirds of the overperformance was due to higher-than-expected tax revenues, as the surge in imports boosted collections of VAT, customs duties, and excise taxes. The remainder of the overperformance is attributable to higher nontax revenues, as well as savings on discretionary and interest expenditures, which offset spending overruns on health care. Preliminary data indicate that the surplus remained at about 2½ percent of GDP through November.

Table 6.

Bulgaria: General Government, 1999-2004

(In millions of leva)

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Sources: Ministry of Finance; and staff projections.

Differs from the budget approved by Parliament in certain revenue items.

Pension and unemployment contributions were combined in January 2002.

Includes additional compulsory social security contributions for public sector employees.