Abstract
This paper examines Bulgaria’s 2004 Article IV Consultation and Ex Post Assessment of Longer-Term Program Engagement. Foreign direct investment inflows have been strong, reserves are rising, and competitiveness appears broadly adequate. Fiscal policy has been tightened in 2003, as the government saved half of the revenue overperformance and reduced the deficit to 0.4 percent of GDP. The pace of structural reform has slowed, with two large privatizations and fiscal structural measures delayed.
This statement provides information that has become available since the issuance of the staff report for the 2004 Article IV Consultation. This information does not change the staff’s appraisal in that report.
High-frequency economic data point to robust growth. Industrial output and sales volume surged by 17¼ percent and 15½ percent year on year, respectively, in the first quarter while twelve-month inflation eased from 6.2 percent in March to 6.1 percent in April. The registered unemployment rate declined to 13.2 percent in April, while real wages increased by 0.1 percent year on year in January-March 2004.
External developments are broadly in line with projections. As expected, the twelvemonth external current account deficit widened to 8.8 percent of GDP in March, with a weaker trade deficit (13.4 percent of GDP) offset by better net income and transfers balances. However, at €280 million in the first quarter, net FDI inflows (mostly greenfield) were higher than expected, covering 58 percent of the current account deficit and contributing, together with strong capital inflows, to a small gain in international reserves.
The growth of credit to the nongovernment sector slowed from 52¼ percent year on year in March to 50¾ percent in April, with credit to households and nonfinancial corporations rising by 80 percent and 40 percent, respectively. The authorities have begun to take measures to reduce bank liquidity by shifting government deposits in commercial banks to the central bank and imposing a reserve requirement of 4 percent (from July 1) on previously excluded instruments with maturities of two years or above, while excluding (from September 1) 50 percent of cash in vault from reserve requirement calculations.
In the first four months of the year, the government accumulated a cash fiscal surplus of 1.4 percent of GDP, reflecting a large revenue overperformance (1.8 percent of GDP), partly offset by higher expenditure (0.4 percent of GDP). The overperformance of tax revenue was due mainly to higher-than-projected corporate profits in 2003 and imports in the first quarter of 2004. The latter led to higher VAT and customs and excise duties. Expenditures for maintenance and operations, subsidies and social programs exceeded budget allocations—in contrast to the authorities’ intention, reported in paragraph 20 of SM/04/179, to limit discretionary central government spending to 93 percent of its downward revised levels through the third quarter.
On June 7 the communications regulatory commission approved the granting of a GSM license to the BTC communications company, thereby removing the remaining obstacle to the completion of its sale. The deadline for the submission of binding bids for the privatization of seven electricity distribution companies was extended to July 9 at the bidders’ request.
On June 4, Bulgaria closed three additional EU accession chapters and negotiations on the last one (competition policy) are expected to be completed by end-June.