IMF Executive Board Completes Fourth Review Under Stand-By Arrangement for Bulgaria

This paper discusses key findings of the Fourth Review Under the Stand-By Arrangement for Bulgaria. Performance in 2006 was broadly satisfactory, although structural reform implementation was weaker than expected. Notably, the government postponed until mid-2007 the launching of the electronic business registry, a key business climate measure. The financial system remains well capitalized and profitable with the modest nonperforming loans. The authorities and IMF staff agreed that the credit restraints should lapse and that Basel II should be implemented cautiously.

Abstract

This paper discusses key findings of the Fourth Review Under the Stand-By Arrangement for Bulgaria. Performance in 2006 was broadly satisfactory, although structural reform implementation was weaker than expected. Notably, the government postponed until mid-2007 the launching of the electronic business registry, a key business climate measure. The financial system remains well capitalized and profitable with the modest nonperforming loans. The authorities and IMF staff agreed that the credit restraints should lapse and that Basel II should be implemented cautiously.

The Executive Board of the International Monetary Fund (IMF) has completed the fourth and final review of Bulgaria’s economic performance under the Stand-By Arrangement for Bulgaria for the period from August 6, 2004 to March 31, 2007. The authorities continue to treat the arrangement as precautionary.

In completing the review, the Board approved the authorities’ request for waivers for the non-observance of the October 1, 2006 structural performance criterion on the acceptance of new company registrations by the new business register and the October 31, 2006 structural performance criterion on the selection of winning bids for the western and eastern plants of Ruse district heating company. The Stand-By Arrangement was approved on August 6, 2004 (see Press Release No. 04/175) for an amount equivalent to SDR 100 million (about US$148.4 million).

Following the Executive Board discussion, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, said:

“Bulgaria is reaping the benefits of sustained sound macroeconomic policies and structural reform efforts with solid real per capita income growth, falling unemployment, and broadly moderate inflation. However, success has been accompanied by mounting underlying vulnerabilities, in particular a high current account deficit and external debt. Prudent fiscal and financial policies and continued structural reform to maintain competitiveness therefore remain necessary to guard against risks.

“The authorities have maintained a firm fiscal stance that remains the central policy pillar supporting the currency board arrangement. This is reflected in the record budget surplus in 2006, which resulted from strong spending restraint and dedicated revenue collection efforts. With the current account deficit projected to remain broadly unchanged, prudence should be the hallmark of economic policies going forward. Accordingly, notwithstanding the planned sizeable increase in real public spending in 2007 in the context of buoyant private demand, the authorities remain firmly committed to tightening the fiscal stance, should external risks warrant.

“Maintaining the soundness of the financial sector has appropriately been a key preoccupation of the supervisory authorities. The authorities are committed to continued prudential vigilance and close cooperation with foreign bank supervisory agencies to ensure a strong financial sector that is resistant to adverse shocks.

“Furthering structural reform has been a challenge, reflected in some delays in the implementation of a few measures. Maintaining the reform momentum will require strong political will, and the government’s commitment to continued structural reform will become evident on the start-up of operations of the electronic business registry. Continued reforms are needed in many areas, including to improve the business climate, further rationalize the education and health care sectors, and lower disincentives to the demand for, and supply of, labor.

“Succeeding in the European Union will require strong policies. Given Bulgaria’s aspirations for euro adoption and the country’s commitment to the currency board arrangement, a high premium must be placed on sustained fiscal prudence, vigilant financial sector oversight, and sustained structural reform,” Mr. Lipsky said.

Bulgaria: Fourth Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance of Performance Criteria
Author: International Monetary Fund