Statement by the IMF Staff Representative

Bulgaria’s request for a 25-month precautionary Stand-By Arrangement (SBA) in an amount of SDR 100 million or 15.62 percent of quota is discussed. The SBA-supported program seeks to reduce increased external vulnerability and to achieve sustainable high growth through a tighter fiscal policy and measures to drain bank liquidity to reduce excess demand in the short term and structural reforms to boost output and export capacity in the medium term.

Abstract

Bulgaria’s request for a 25-month precautionary Stand-By Arrangement (SBA) in an amount of SDR 100 million or 15.62 percent of quota is discussed. The SBA-supported program seeks to reduce increased external vulnerability and to achieve sustainable high growth through a tighter fiscal policy and measures to drain bank liquidity to reduce excess demand in the short term and structural reforms to boost output and export capacity in the medium term.

This statement provides information that has become available since the issuance of the staff report. This information does not change the staff’s appraisal in that report.

  • The two prior actions for Board consideration of the stand-by request have been completed. The draft NRA procedural code was submitted to parliament on July 26, while the draft Bulstat Register Act was submitted to parliament on July 28. Moreover, incomplete data suggest that the indicative fiscal targets for end-June 2004 have been met.

  • High-frequency economic data point to continued robust growth, but inflation has risen further. Industrial output and sales volume surged by 20.4 percent and 18.8 percent, respectively, year on year in May, while the unemployment rate declined further to 12.2 percent in June. However, twelve-month inflation rose further to 7.3 percent in June, in part reflecting the relatively sharper year-ago monthly drop in the price of food—which accounts for 37 percent of the CPI.

  • External developments present a mixed picture, but are broadly in line with projections. The twelve-month external current account deficit narrowed to 8.1 percent of GDP in May, with a somewhat wider than expected trade deficit (13.6 percent of GDP) offset by better net income and transfers balances. Net FDI inflows totaled €421 million in January-May, covering nearly 46 percent of the current account deficit and contributing, together with other capital inflows, to a gain in international reserves to €5.7 billion. With the receipt of the proceeds from the BTC privatization in June, FDI coverage of the current account deficit should jump significantly.

  • Financial market confidence in Bulgaria remains strong. On August 4, Fitch Ratings became the second major international rating agency to raise Bulgaria’s credit rating to investment grade this year. Meanwhile, spreads on Bulgarian sovereign debt—as measured by the Bulgaria component of the EMBI—have narrowed further, reaching 123 basis points on August 4, 2004.

  • Preliminary data for July point to a renewed pick-up in the growth of bank credit to the nongovernment sector to nearly 53 percent year on year, suggesting that the decline in June partly reflected a high base in June 2003. Nevertheless, the staff continues to expect a slowdown in credit growth during the remainder of the year, as the full effect of the measures already implemented begins to be felt.

  • Fiscal performance has remained strong. In the first half of 2004, the general government balance recorded a cash surplus of 2.1 percent of GDP, against a programmed indicative target of 1.8 percent of GDP. The overperformance reflected largely higher revenues.

  • The government has selected the winning bidders for the sale of 67 percent stakes in seven electricity distribution companies. Proceeds from the sale, which should be finalized by end-October, are expected to total nearly €700 million, or some €300 million (1½ percent of GDP) more than assumed in the program. Meanwhile, Bulgartabac has invited bids for the privatization of four cigarette companies, grouped into two packages. Several foreign companies have expressed interest.