Front Matter Page
© 2007 International Monetary Fund
December 2007
IMF Country Report No. 07/389
Bulgaria: 2007 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Bulgaria
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2007 Article IV consultation with Bulgaria, the following documents have been released and are included in this package:
The staff report for the 2007 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on October 16, 2007, 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 November 29, 2007. 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 Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its December 17, 2007 discussion of the staff report that concluded the Article IV consultation.
A statement by the Executive Director for Bulgaria.
The document listed below has been or will be separately released.
Selected Issues Paper
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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Front Matter Page
INTERNATIONAL MONETARY FUND
BULGARIA
Staff Report for the 2007 Article IV Consultation
Prepared by the Staff Representatives for the 2007 Consultation with Bulgaria
Approved by Juha Kähkönen and Matthew Fisher
November 29, 2007
Front Matter Page
Executive Summary
Background: Driven by massive capital inflows, the current-account deficit could reach a record level of 20 percent of GDP in 2007. The external imbalance finances an investment boom; private consumption, reflecting restrained fiscal and incomes policies, has remained contained. Credit growth is also strong, but the largely foreign-owned banking system seems well positioned to absorb adverse shocks. Headline inflation has picked up sharply, mainly reflecting non-core inflation shocks, but wage growth is also accelerating, owing to a tightening labor market. Pressures for large public-sector wage hikes threaten to add to labor cost and inflation pressures.
Staff views: The main challenge is to maintain prudent fiscal and incomes policies to avoid procyclical demand impulses. A stronger push on long-delayed structural reforms, particularly reforms raising public sector efficiency, is also needed. Credit portfolios should be monitored carefully, as present boom conditions may mask underlying credit quality weaknesses. These policies should provide a solid basis for sustaining the currency-board arrangement and achieving Bulgaria’s medium-term ambition of accelerated real convergence and deeper EU integration, including through euro adoption. At the same time, failure to keep fiscal and incomes policies in line with the stringent requirements of the currency board could eventually result in a misaligned real exchange rate, likely entailing an abrupt external adjustment or a prolonged period of slow growth.
The authorities’ views: The authorities broadly agreed with the staff’s diagnosis and policy proposals. They noted that they see no viable alternative to the currency board arrangement. Policies would therefore have to remain consistent with sustaining external competitiveness while increasing buffers against adverse shocks.
Contents
Executive Summary
Glossary
I. Overview
II. Background
III. Policy Discussions
A. Outlook and External Stability Risks
B. Fiscal Policy
C. Financial Sector Policies
D. Structural Reforms
IV. Staff Appraisal
Boxes
1. Bulgaria’s Reactions to IMF Advice
2. Inputs for External Stability Risk Assessment
Figures
1. Key Macroeconomic Forces at Work, 2002–07
2. Bulgaria and Selected New Member States: Similarities and Differences in their Absorption Booms, 2004–06
3. Asset Price and Country Risk Developments, 2001–07
4. Bulgaria: Selected EU Countries: Financial Soundness Indicators
5. Global Credit Crunch Fears, Developments in High-Frequency Indicators
6. Labor Market Developments, 2002–07
7. Inflation, 2004–07
8. Bulgaria: Selected EU Countries: Real Income Convergence, Labor Utilization Versus Labor Productivity, 2006
9. Macroeconomic Prospects Under Loose Fiscal and Incomes Policies, 2007–2012
10. Bulgaria: Selected EU Countries: Indicators of Capital Market Development
Tables
1. Selected Economic and Social Indicators, 2004–08
2. Real GDP by Expenditure Category and Implicit Deflators, 2004–08
3. Balance of Payments, 2005–2012
4. External Financial Assets and Liabilities, 2005–2012
5a. General Government Operations and Balance Sheet, 2004–08 (In millions of leva)
5b. General Government Operations and Balance Sheet, 2004–08 (In percent of GDP)
6. Monetary Accounts, 2005–2012
7. Private Sector Credit Flows, 2003–07
8. Financial Soundness Indicators, 2004–07
9. Rankings of Selected Competitiveness and Structural Indicators
10a. Macroeconomic Framework, Baseline, 2005–2012
10b. Macroeconomic Framework, Alternative Scenario, 2005–2012
Appendices
I. Debt Sustainability Analysis
II Relations with the Fund
III. IMF-World Bank Relations
IV. Statistical Issues
Glossary
| AML/CFT | Anti-Money Laundering and Combating the Financing of Terrorism |
| BNB | Bulgarian National Bank |
| CDS | Credit Default Swaps |
| CPI | Consumer Price Index |
| EBRD | European Bank for Reconstruction and Development |
| EIU | Economist Intelligence Unit |
| EMBI | Emerging Market Bond Index |
| EUR | IMF European Department |
| FAD | IMF Fiscal Department |
| FDI | Foreign Direct Investment |
| FSAP | Financial Sector Assessment Program |
| GFS | Government Finance Statistics |
| GIR | Gross International Reserves |
| GNFS | Goods and Non-factor Services |
| GNI | Gross National Income |
| HICP | Harmonized Index of Consumer Prices |
| HIPC | Heavily-Indebted Poor Countries |
| IBRD | International Bank for Reconstruction and Development |
| IFC | International Finance Corporation |
| IFS | International Financial Statistics |
| IIP | International Investment Position |
| ILO | International Labor Organization |
| LIBOR | London Interbank Offered Rate |
| MCM | IMF Monetary and Capital Markets Department |
| MDRI | Multilateral Debt Relief Initiative |
| MONEYVAL | Committee of Experts on the Evaluation of AML/CFT Measures |
| NMS | New Member States |
| NSI | National Statistical Institute |
| NSSI | National Social Security Institute |
| OED | Office of Executive Director |
| PB | Primary Balance |
| PDR | IMF Policy Development and Review Department |
| PPI | Producer Price Index |
| PPP | Purchasing Power Parity |
| REER | Real Effective Exchange Rate |
| ROSC | Report on the Observance of Standards and Codes |
| SDDS | Special Data Dissemination Standard |
| SME | Small and Medium Enterprises |
| STA | IMF Statistics Department |
Front Matter Page
Public Information Notice (PIN) No. 07/142
FOR IMMEDIATE RELEASE
December 19, 2007
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
On December 14, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1
