Statement by the IMF Staff Representative April 3, 2006

1. This statement provides information on recent revisions to historical data, new data releases, and the outstanding prior action that has become available since the issuance of the staff report on March 16. The new information does not change the thrust of the staff appraisal.

2. Historical data for the current account deficits in 2004 and 2005 have been revised down. The change in the balance of payments methodology that led to these revisions was foreshadowed in the staff report (¶6, footnote 4) and has been endorsed by the IMF Statistics Department.¹ The 2004 deficit was lowered from 8.5 percent of GDP to 5.8 percent, and the 2005 deficit was reduced from 14.9 percent of GDP to 11.9 percent (see attached table and text figure). Although the level of the current account deficit in both years is lower than previous estimates, the deterioration between 2004 and 2005 remains broadly unchanged at over 6 percentage points of GDP. The lower deficits and an upward revision of 2004 inward investment have also raised the FDI coverage of the current account deficit (from 73 to 87 percent in 2005).

3. Data for January 2006 show a further deterioration of the current account deficit. Based on the new methodologies, in January 2006 the 12-month current account deficit deteriorated by almost one percentage point to 12.8 percent of GDP (text figure). Unusually large oil imports by the refinery and a weak services balance played a key part in this deterioration. At this stage, staff continues to expect the current account balance to improve later in 2006 consistent with the projections in the staff report. Taken together, the revised historical data and the new data for January 2006 do not significantly change the thrust of the analysis contained in the staff report—namely that rising private demand and exogenous shocks have increased external vulnerabilities beyond levels envisaged under the 2005 economic program.

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Bulgaria: Current Account Deficit in Percent of GDP

(12-month rolling, January 2004–January 2006)

Citation: IMF Staff Country Reports 2006, 131; 10.5089/9781451804539.002.A002

Note: The 12-month rolling current account deficit for 2004 for the new series is calculated on the basis of an expected revision to the monthly 2003 series of 2.7 percent of GDP.

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4. Historical data used to compute unit labor costs for manufacturing have also been partially revised, with possible consequences for the assessment of competitiveness. The National Statistical Institute has revised upward employment data for 2004 and 2005, reflecting a larger survey of companies. Other things being equal, the new data reduce staff estimates of productivity in manufacturing, resulting in an appreciation of the estimated unit labor cost based real effective exchange rate (ULC-REER) for that sector. Specifically, in contrast to the average depreciation of 5 percent during January–September 2005 shown in the staff report (Figure 3), the average ULC-REER now shows an appreciation of 1.9 percent for 2005 as a whole. However, expected revisions to output data for manufacturing could raise estimates of productivity, implying a smaller deterioration in the ULC-REER. This issue remains under investigation.

5. Headline inflation in February 2006 was higher than projected, but core inflation has eased somewhat. Year-on-year inflation reached 8.8 percent, compared with a staff projection of 8.2 percent, mainly due to a higher-than-projected impact of the January excise tax increases. By contrast, year-on-year core inflation remained steady at 3.5 percent in February 2006, about the same rate as the previous two months.

6. The remaining prior action has been implemented and faster-than-anticipated progress has been made with privatization. Parliament approved the business registration law and ancillary amendments in related laws on March 24, thus completing the prior action. The privatization agency agreed to sell the Varna electricity generation company well ahead of the end-June performance criterion. Moreover, discussions on the sale of the Bobov Dol electricity generation company are expected to be brought to a successful conclusion soon, following the recent resolution of the court case.

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