IMF Concludes 2004 Article IV Consultation with Bulgaria

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 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.

On June 14, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1


Bulgaria’s economic performance has continued to improve since the 1996–97 crisis. A policy strategy anchored by the currency board arrangement and supported by a prudent fiscal policy, a strict incomes policy for state-owned enterprises, and structural reforms, has resulted in average real GDP growth of 4½ percent since the last Article IV consultation. The unemployment rate, although still high, has dropped considerably, and inflation has remained subdued. The Currency Board Arrangement has provided necessary stability to the economy, and the accompanying tight fiscal policy has allowed public debt to decline commensurately. In 2003, Bulgaria tightened fiscal policy, saving half the revenue overperformance and reducing the deficit to 0.4 percent of GDP. The ex post assessment of Bulgaria’s long-term involvement with Fund-supported programs concluded that the relationship had been generally effective and that a program-based engagement would be the most effective way of supporting the government’s economic program in the run-up to European Union accession in 2007.

Despite generally favorable macroeconomic developments, Bulgaria faces a risk of economic overheating due to a surge in credit growth and a related sharp widening of the current account deficit. Bank claims on the nongovernment sector rose by nearly 8 percentage points of GDP in 2003, and their growth has not abated. Bank prudential indicators, however, show no signs of deterioration. The credit-induced import boom widened the current account deficit to 8½ percent of GDP in 2003. However, foreign direct investment inflows have been strong and reserves have been rising. Competitiveness remains broadly adequate, but warrants close monitoring.

Structural reforms have continued, albeit at a slower pace. Bank privatization has been completed. Measures have been taken to bring energy prices to cost-recovery levels, and the restructuring of electricity distribution companies has advanced. In the fiscal area, the large taxpayer office was expanded, and program budgeting and better budget preparation practices were initiated. However, progress has been limited in reforming the health, education, and railway sectors. Furthermore, delays in selling tobacco holding Bulgartabac remain troubling.

For 2004, given the high credit growth and the associated risks of economic overheating, the authorities have agreed to a deficit of 0.4 percent of GDP—rather than 1.2 percent of GDP as originally planned in the budget—and to further use the expected overperformance of revenue to attain balance for the year. They also intend to achieve balance in the coming years, although EU-related expenditures may necessitate a small deficit in 2007. The authorities have planned to reduce bank liquidity to the extent permitted by an open capital account by tightening reserve requirements and shifting government deposits from commercial banks to the central bank. In order to enhance Bulgaria’s supply potential to attain sustainable higher growth, the authorities plan to undertake measures to further improve governance and the business climate. Furthermore, privatization of remaining state-owned enterprises is also being planned, not only to help alleviate risks emanating from high current account deficit but also to facilitate further FDI inflows.

Executive Board Assessment

Executive Directors welcomed the solid economic performance in recent years, which—despite a weak external environment—has delivered robust economic growth, a reduction in unemployment, moderate inflation, and declining public and external debt ratios, and supported the authorities’ commitment to persevere with their policy framework. However, they were concerned about the recent widening of the external current account deficit caused by a sharp expansion of credit, and emphasized the need to moderate the pace of domestic demand as well as accelerate structural reforms to boost output and export potential.

Directors noted that the credit boom has led to a surge in imports, and may point to possible economic overheating. However, they considered that it does not presently seem to represent a threat to financial stability owing to the strengthened supervisory practices of the Bulgarian National Bank (BNB) and the sound financial positions of banks. Nevertheless, Directors were concerned that, if left unchecked, the rapid credit growth and the increase in foreign borrowing might further exacerbate the external imbalance and undermine the favorable external debt dynamics and solid economic performance of recent years.

Directors encouraged the authorities to tighten macroeconomic policies more forcefully to address these challenges. They recommended a mix of policies—within the constraints of the currency board arrangement (CBA)—to moderate demand and enhance supply as well as export capacity by tightening the fiscal stance, draining liquidity from the banking system, and implementing structural reforms, including privatization, more vigorously. The timely adoption of such policies, and pursuit of the recommendations of the Financial Sector Assessment Program (FSAP) follow-up, will also support maintaining the currency board arrangement until euro introduction.

Against this background, Directors viewed the authorities’ macroeconomic program for 2004–05 as adequate, although many of them would have preferred a more ambitious fiscal adjustment, especially in 2004, to dampen domestic demand, particularly as the CBA constrains monetary policy actions. They commended the authorities for reversing the expansionary stance of the 2004 budget and for envisaging budget balance in 2005. In light of the revenue overperformance so far in 2004, they urged the authorities to save the overperformance at least until budget balance is assured, and to resist pressures to increase spending in the run up to next year’s election. Directors welcomed the authorities’ intention to undertake further fiscal tightening should the current account or inflation performance be weaker than currently projected.

With regard to the medium term fiscal position, and in view of the need to accommodate higher infrastructure spending in the future, Directors cautioned the authorities to implement their strategy of shifting partially from direct to indirect taxation in a revenue neutral way, and urged them to accelerate reforms to strengthen tax administration and expenditure management. Measures are also needed to ensure the sustainability of the pension and health care systems. Finally, in light of the need to enter ERM2 with a solid fiscal position, Directors encouraged the authorities to take timely steps to prevent fiscal deficits upon EU accession.

Directors commended the authorities for their measures to reduce credit growth by tightening reserve requirements and shifting certain government and other deposits from commercial banks to the central bank. However, as the effectiveness of these measures remains to be seen in the context of an open capital account, fiscal flexibility needs to be maintained to respond promptly if credit expansion continues to fuel excessive growth of domestic demand and imports.

Directors strongly supported the authorities’ intention to complement demand management policies with structural reforms aimed at enhancing supply. They were encouraged by the authorities’ focus on measures to improve the business climate, including by reducing barriers to entrepreneurial activity and making the labor market more flexible, which will help to attract greater foreign direct investment. Directors noted that structural reforms have slowed, with the privatization of some major state monopolies still incomplete, and little progress in health, education, and railway sector reforms. As privatization is critical to meeting Bulgaria’s external financing requirements in the next few years and to increasing productivity, they welcomed the long-delayed sale of the telecoms company (BTC) and the plans to complete the privatization of the tobacco holding (Bulgartabac) as well as to sell the electricity distribution companies before year end. The establishment of a new privatization pipeline for 2005-06 is also crucial.

Directors welcomed the opportunity to review Bulgaria’s program engagement with the Fund since the mid 1990s. They considered that the ex post assessment (EPA) contains a balanced analysis of the country’s performance under Fund arrangements and of the role played by the Fund in Bulgaria. The EPA also highlights that strong country ownership from the outset is critical for the success of Fund-supported programs. Directors noted that the 1996/97 crisis had been a watershed for the country, triggering a fundamental change in policies and boosting program ownership. They considered that the Fund had played an important role in providing a blueprint for reform and in helping to muster domestic support for its successful implementation since the crisis. As important macroeconomic risks remain, most Directors viewed continued Fund engagement under a successor Stand-By Arrangement (SBA) appropriate to support the government’s economic program and help maintain policy discipline, provided that economic policies and the commitment to reform are consistent with the need to reduce macroeconomic risks. However, given the long-term program engagement and the absence of an imminent financing need, they concurred with the authorities that a new SBA should have lower access and be precautionary, and provide a clear strategy for the transition from a program-based relationship with the Fund. Most Directors were of the view that in this regard EU accession, expected for early 2007, should offer a natural exit. A few Directors, while prepared to go along with a precautionary SBA, noted that a surveillance-only relationship would be as effective in supporting the authorities’ economic program, and would not imply a reduced role for the Fund.

Directors welcomed the improvements in data quality as well as the decision to subscribe to the Fund’s Special Data Dissemination Standard.

Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Bulgaria: Selected Economic Indicators

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Sources: Bulgarian authorities; and IMF Staff estimates.


The Currency Board arrangement fixed the exchange rate at 1,000 leva = 1 DM through end-1998 and 1,955.83 leva = 1 euro since January 1, 1999. On July 5, 1999, the lev was redenominated by removing three zeroes.

Annual average level.



Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

Bulgaria: Staff Report for the 2004 Article IV Consultation
Author: International Monetary Fund