Statement by the IMF Representative on Bulgaria February 4, 2004

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.

This statement provides information that has become available since the issuance of the staff report for the fourth review under the stand-by arrangement for Bulgaria. This information does not change the staffs appraisal in that report.

  • The second of two prior actions for Board consideration of this review was completed on January 22, when the Bulgarian National Bank announced a reduction, effective April 1, 2004, in the test period for classifying loans as loss from 120 to 90 days. Minimum provisioning for loans 61 to 90 days overdue has also been raised from 30 percent to 50 percent.

  • Indications are that all performance criteria for end-December were observed, with the exception of the ceiling on tax arrears to the General Tax Directorate, for which a waiver has been requested, hi particular, staff has confirmed that the following performance criteria were observed: ceilings on contracting and guaranteeing public sector debt; the floor on the Fiscal Reserve Account (FRA); the ceiling on use of FRA resources to acquire policy-related assets; and the ceiling on arrears to the National Social Security Institute. Preliminary data on the performance criteria for which waivers of applicability were requested—the general government deficit and wage bill of selected public enterprises—indicate that these have been observed as well.

  • Macroeconomic data point to further robust growth but also continued external risks. Industrial production rose by 11 percent year-on-year and industrial sales by 14 percent in November. The twelve-month external current account deficit rose to 8¾ percent of estimated GDP in November, up from 8½ percent in October, with FDI coverage at 80 percent for the same period, and reserves roughly unchanged, at 5.2 billion euros. Year-on-year growth in bank claims on the nongovernment sector decelerated slightly for the second consecutive month in December, reaching 40½ percent in real terms. Owing to higher food and fuel prices, December inflation was significantly higher than expected—1.8 percent month-on-month compared with a projected 0.7 percent—leaving end-year inflation at 5.6 percent.

  • Preliminary fiscal data indicate that a very small general government surplus was achieved in 2003, in line with understandings reached during discussions for the review. Both revenues and expenditures were some ¾ percentage point of GDP higher than expected (net of tax arrears clearance operations), with the additional expenditures largely in the social spheres and for arrears clearance.

  • The Bulgarian Privatization Agency has formally invited the winning bidder for the state telecommunications company, BTC, to sign the sales contract by February 20. Advent International has agreed to purchase 65 percent of BTC for 230 million euros and to invest a minimum of 400 million euros over the next five years.

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