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Bulgaria: Second Review Under the Stand-By Arrangement and Requests for Waiver of Performance Criteria and Postponement of Third Review—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Bulgaria

In the context of the second review under the Stand-By Arrangement and requests for a waiver of performance criteria and postponement of the third review, the following documents have been released and are included in this package:

• the staff report for the Second Review Under the Stand-By Arrangement and Requests for Waiver of Performance Criteria and Postponement of Third Review, prepared by a staff team of the IMF, following discussions that ended on January 26, 2006, with the officials of Bulgaria on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 15, 2006. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

• a staff statement of March 28, 2006 updating information on recent developments.

• a Press Release summarizing the views of the Executive Board as expressed during its April 3, 2006 discussion of the staff report that completed the review and requests.

• a statement by the Executive Director for Bulgaria.

The documents listed below have been or will be separately released.

• Letter of Intent sent to the IMF by the authorities of Bulgaria*

• Second Supplementary Memorandum of Economic and Financial Policies by the authorities Bulgaria*

• *Also included in Staff Report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.

Copies of this report are available to the public from

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International Monetary Fund

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INTERNATIONAL MONETARY FUND

BULGARIA

Second Review Under the Stand-By Arrangement and Requests for Waiver of Performance Criteria and for Postponement of Third Review

Prepared by the European Department

(In consultation with the Policy Development and Review Department)

Approved by Ajai Chopra and Matthew Fisher

March 15, 2006

Contents

• List of Acronyms

• Executive Summary

• I. Introduction

• II. Recent Developments

• III. The 2006 Program

  • A. Outlook and Risks

  • B. Fiscal Policy and Reforms

  • C. Incomes and Labor Market Policies

  • D. Financial Sector Policies

  • E. Other Structural Reforms

  • F. Program Conditionality and Waiver Requests

  • G. Data Issues

• IV. Staff Appraisal

• Text Tables

• 1. Selected Economic Indicators, 2004–05

• 2. National Accounting Indicators, 2005

• 3. External Current Account, 2005

• 4. Fiscal Operations, 2004–05

• 5. Domestic Financial Flows 2004–05

• 6. Fiscal Position, 2004–06

• 7. Structural Conditionality Under the Stand-By Arrangement, 2006

• Text Figures

• 1. Year-on-Year Inflation Projection, 2005–06

• 2. Current Account Deficit and Trade Volume Growth, 2005–06

• 3. Household Credit and Imports of Consumer Goods, 2002–05

• Box

• 1. Current Account Developments, 2004–06

• Figures

• 1. Real Sector Developments, 2003–05

• 2. Balance of Payments Developments

• 3. Competitiveness Indicators

• 4. Fiscal Sector Developments

• 5. Financial Sector Indicators

• 6. Bulgaria and Comparator Countries, Selected Macroeconomic Indicators, 2004–05

• 7. Baseline Medium-Term Projections, 2001–2011

• 8. External Debt Sustainability: Bound Tests, 2001–2011

• 9. Public Sector Debt Sustainability: Bound Tests, 2001–2011

• Tables

• 1. Proposed New Schedule of Purchases Under the Stand-By Arrangement

• 2. Observance of Structural Conditionality Under the Stand-By Arrangement in 2005

• 3. Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement (In millions of leva)

• 4. Selected Economic Indicators, 2001–06

• 5. Selected Vulnerability Indicators, 2002–06

• 6. Real GDP by expenditure category, 2001–06

• 7. Balance of Payments, 2004–06 (In millions of euros)

• 8. Balance of Payments, 2004–06: Analysis of Developments

• 9. Monetary Survey, 2004–06 (In millions of leva)

• 10. General Government Operations, 2001–06 (In millions of leva)

• 11. General Government Operations, 2001–06 (In percent of GDP)

• 12. Balance of Payments, 2002–2011 (In millions of euros)

• 13. Macroeconomic Framework, 2002–2011

• 14. External Debt Sustainability Framework, 2001–2011 (In percent of GDP)

• 15. Public Sector Debt Sustainability Framework, 2001–2011 (In percent of GDP)

• 16. Capacity to Repay the Fund, 2003–2011

• 17. Financial Relations with the Fund, 2000–2010

• Appendices

• 1. Fund Relations

• 2. IMF-World Bank Relations

• 3. Statistical Issues

• Appendix Tables

• 18. ROSCs

• 19. Technical Assistance, 1999–2006

• 20. Active World Bank Operations (Net of cancellations)

• 21. Common Indicators Required for Surveillance

• Attachment

• I. Letter of Intent and Second Supplementary Memorandum of Economic and Financial Policies

List of Acronyms

Executive Summary

• Despite policy tightening, the external current account deficit has widened sharply since the first SBA review, heightening external vulnerability. The current account deficit widened to nearly 15 percent of GDP as private saving declined and investment rose, and the external debt ratio increased as the current account gap was partly financed by private external borrowing. By contrast, in line with program commitments, the fiscal position has strengthened further and credit expansion slowed.

• In view of the larger than expected widening of the current account deficit, the economic program for 2006 relies on fiscal and credit restraint to rein in demand and strengthen the balance sheets of government and banks, and on structural reforms to stimulate supply.

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    The fiscal target is a surplus of 3 percent of GDP, up from 2.3 percent in 2005. The revenue projection assumes a neutral impact of tax administration reforms. Half of any excess revenue is to be saved under an adjustor. The surplus target hinges on the full implementation of agreed discretionary cuts and resisting pressure for additional spending.

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    The credit program envisages reducing credit expansion to 17.5 percent, down from 32.3 percent in 2005. Quarterly credit growth limits and higher penalties for exceeding them are expected to help ensure achievement of this target. Measures to slow down household credit should additionally contribute to current account adjustment and crowd in business credit.

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    Structural reforms aim at improving the business climate. They include introduction of a new business register, steps to improve the functioning of the labor market, and privatization or concessioning of state assets.

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